Investing in beaten-down dividend stocks can help investors benefit from a higher yield and capital gains when market sentiment improves. However, it's essential for investors to avoid picking dividend stocks based solely on their yield. Instead, you need to consider several other factors - including cash flow growth, payout ratio, and balance sheet debt - before adding dividend stocks to your portfolio.
Two quality dividend stocks that currently trade at a discount to Wall Street's consensus price-target estimates are McDonald’s (MCD) and Nike (NKE). Let’s see why it makes sense to buy these two dividend stocks on the dip.
Is McDonald’s Stock a Good Buy Right Now?
Valued at a market cap of $194 billion, McDonald’s is a household name and among the largest restaurant companies globally. In the last 20 years, MCD stock has returned 920% to shareholders. But after adjusting for dividend reinvestments, cumulative returns almost double to 1,640%. Despite these outsized gains, MCD stock is down 10% from all-time highs following its Q1 results.
In the March quarter, McDonald’s reported mixed results, as company-wide reorganization efforts weighed on the bottom line, while boycotts negatively impacted sales in the Middle East. Additionally, the company emphasized that consumers globally are pulling back on eating out due to a challenging macro environment.
In Q1 of 2024, McDonald’s reported revenue of $6.17 billion and adjusted earnings of $2.70 per share. Comparatively, analysts forecast revenue at $6.16 billion with earnings at $2.72 per share.
The pullback in MCD stock has increased its dividend yield to 2.5%, given it pays shareholders an annualized dividend of $6.68 per share. In Q1, McDonald’s reported a free cash flow of $7.25 billion and paid shareholders a quarterly dividend of $1.2 billion, indicating a payout ratio of just 17%. The company has enough room to increase its dividend payout, which is something it has done for several years. In the last 25 years, MCD has raised its dividends by 15% annually, significantly enhancing the yield at cost.
Out of the 31 analysts covering MCD stock, 17 recommend “strong buy,” three recommend “moderate buy,” and 11 recommend “hold.” The mean target price for MCD stock is $316, almost 18% higher than current prices.
How High Can Nike Stock Rise?
Among the most recognizable brands globally, Nike has trailed the broader markets in recent years. Valued at a market cap of $140 billion, Nike stock is down 47% from all-time highs. In the last decade, Nike stock has returned 188% to shareholders after accounting for dividends, trailing the S&P 500 Index's ($SPX) returns of more than 200%.
Nike’s sales originating from China declined in fiscal Q3 of 2024 (which ended in February), but the company still exceeded estimates in the holiday quarter. It reported revenue of $12.43 billion with adjusted earnings of $0.77 per share. Wall Street forecast revenue at $12.28 billion on earnings of $0.74 per share. Nike cited strong demand from North America for boosting sales growth in Q3.
Similar to other companies, Nike is looking to improve profit margins amid inflation and higher interest rates. In late 2023, it announced a restructuring plan to reduce costs by $2 billion over three years. In Q1 of 2024, it reduced its workforce by 2% and reinvested these savings in growth areas.
In Q3, Nike reported a free cash flow of $6.2 billion and paid dividends worth $562 million, indicating a payout ratio of less than 10%. It offers shareholders a dividend yield of 1.6%, and increased these payments by 200% in the last 10 years.
Out of the 29 analysts covering Nike stock, 17 recommend “strong buy,” two recommend “moderate buy,” nine recommend “hold,” and one recommends “strong sell.” The mean target price for NKE stock is $114.19, about 22.4% higher than current prices.
Priced at 27x forward earnings, NKE stock is not too expensive, given earnings are forecast to rise by 12.5% annually in the next five years.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
