Fast-food giant McDonald's (MCD) struggled mightily during the first half of 2024, as cash-conscious consumers started to steer away from the chain's iconic burgers and fries. After a couple of disappointing quarterly earnings reports sent the stock lower, the legendary Dividend Aristocrat seemed to be on the cusp of finding the legs for a turnaround - and then this week's headlines threw McDonald's back into the spotlight for all the wrong reasons, as a foodborne illness outbreak was traced back to the restaurant's Quarter Pounders.
With MCD still trading only about 5% away from its newly set highs, is this Dividend Aristocrat a good buy right now for value investors - or is McDonald's stock looking a little overcooked? Here's a deeper dive.
About McDonald's Stock
Valued at $217.3 billion, McDonald's (MCD) is the undisputed king of the fast-food industry. Having pioneered the art and science of quick-service restaurants, MCD is the biggest name in the business, with approximately 42,000 stores globally.
After a bumpy start to the year, MCD has bounced back from July's YTD lows, rising more than 23% from that low point. The shares were actually looking overbought, based on their 14-day Relative Strength Index (RSI), prior to this week's sharp pullback. MCD is now flat on a YTD basis, and is up about 16% over the past 52 weeks.
McDonald's is priced at a reasonable valuation, offering investors an opportunity to acquire shares at a fair value. The stock trades at 25.6 times forward earnings, slightly below its five-year historical average.
MCD's Dividend History
For 47 years, McDonald's has been a feast for dividend-hungry investors, consistently serving up growth. After establishing its credentials as a Dividend Aristocrat, MCD is now on pace to become a “Dividend King” by the end of the decade.
Currently, the fast-food giant pays a quarterly dividend of $1.77, yielding 2.35% at current levels. That outpaces the S&P 500 Index's ($SPX) average yield of 1.32%. MCD's payout ratio of 57% suggests a sustainable dividend policy that balances returning income to investors while retaining enough capital to fund future growth and operations.
McDonald's Attempts a Turnaround
There is no doubt that McDonald's has maintained a solidly profitable business over the years, aided by steady income from its real estate portfolio - but recent quarters have seen a noticeable slowdown in growth. Along with sluggish domestic results, the ongoing Middle East conflict has also been a pain point.
In response, McDonald's introduced combo meals priced at just $5, which helped to bring customers back, although not without an impact on margins.
Looking ahead, McDonald's is set to announce its third-quarter earnings on Oct. 29, with Wall Street looking for flat earnings growth at $3.17 per share. Revenue is expected at $6.80 billion, marginally higher than last year.
What Do Analysts Say about McDonald's Now?
The consensus rating on Wall Street is a “Moderate Buy,” though analysts seem split about the impact of this week's outbreak on MCD stock.
Baird analyst David Tarantino downgraded the stock to “Neutral” from “Outperform," marking one of the most negative reactions.
"While we are confident MCD ultimately can effectively manage through the E. coli issue successfully, the elevated risk related to the near-term demand outlook for the U.S. gives us some pause at the same time we are seeing signs of an increasingly challenging economic backdrop outside the U.S.," Tarantino wrote in a note accompanying the downgrade.
Other brokerage firms, including JPMorgan and Morgan Stanley, cautioned against emotional overreactions and knee-jerk selling.
“If the issue is, in fact, confined to a single vegetable supplier, as noted, we think that is probably the best outcome in this type of situation,” wrote Morgan Stanley's Brian Harbour. “As such, while this creates some business disruption in the short term in select markets, we don't think this is a medium/longer-term threat to MCD's business stability or reputation.”
The average price target for MCD now stands at $319.80, implying expected upside of 7.4% from here.
The Bottom Line on MCD Stock
Despite current challenges, McDonald's remains a robust long-term investment option for those seeking stable returns and reliable dividend growth. With its appealing valuation and resilient franchise model, MCD looks like an appealing buy on any dips for income investors.
On the date of publication, Nauman Khan 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.
