This Dividend Growth Stock Giant is On Sale

If there is a bright side to a market pullback, it’s that it puts many high-performing stocks on sale. Wall Street tends to become a lot less discerning when worries spike about an upcoming recession, as they have in recent months. The stocks of many successful businesses are selling off today, along with those that are at higher risk of seeing a sharp earnings slump during a cyclical downturn.

McDonald’s (MCD) is a great example. The fast food giant’s last few earnings updates show that it is firing on all cylinders even as consumer spending patterns slowed through the early summer months. And, while no business is immune to a recession, Mickey D’s will likely emerge from any pullback with its market leadership intact.

With that positive backdrop in mind, let’s look at three specific reasons to like this restaurant stock right now.

1. McDonald’s is offering up tasty momentum
McDonald’s will update investors on its latest performance in October, and there’s every reason to expect to hear good news in that report. Year-over-year sales in the most recent quarter were up 12% globally and 10% in the core U.S. market, for example. Compare that figure to Chipotle‘s 7% year-over-year increase for confirmation that McDonald’s is steadily winning market share in a competitive industry.

Whereas Chipotle and other rivals are pushing into the to-go and drive-thru channels, McDonald’s established dominance here is helping it stand out with fast-food fans. Sales are also being lifted by the popularity of both its core menu items and those limited-time product launches. “The McDonald’s brand has never been stronger,” CEO Chris Kempczinski told investors in late July.

2. Profits and cash
Restaurants are notoriously hard to operate profitably — unless you have some major efficiency advantages you can tap into. For McDonald’s, these include its huge global sales base, valuable brand, and steady franchise, royalty, and rent fees.

These factors help the chain convert over 40% of revenue into operating profit each year. Cash flow is similarly strong, at nearly $7 billion per year. And shareholders can expect their returns to be further boosted by McDonald’s growing dividend payout, which is currently yielding 2.2%.

3. McDonald’s stock is available at the right price
Perhaps the best reason to be excited about McDonald’s stock today is that it is available at a sizzling discount. Shares are trading for 24 times earnings right now, down from a P/E ratio of 32 earlier in the year. The fast food giant’s valuation has also hit a 2023 low when it comes to its price-to-sales valuation. That metric recently sank to 8 times sales, compared to 9.5 times sales back in May.

Sure, that decline partly reflects the likelihood of weakening consumer spending patterns ahead. McDonald’s focus on value and its steady flow of franchise fees insulates it from some of this shift. Yet the business would still likely be pinched by a recession should one develop into 2024.

Patient investors can look past any rockiness that might harm the short-term earnings picture. From its push into using fresher ingredients to its slimmed-down menu, McDonald’s has demonstrated in recent years that it can adapt to a wide range of selling conditions and wildly shifting consumer preferences. That ability will be valuable in 2024 and beyond and should support strong shareholder returns from today’s prices.

— Demitri Kalogeropoulos

Source: The Motley Fool