ii view: McDonald's beefs up American business, but shrinks overseas

Sequential sales improvement and an ongoing dividend payment – drive-thru or drive past?

Fourth-quarter results to 31 December

• Global comparable sales down 1.3% 
• Earnings per share down 14% to $1.70

Chief executive Chris Kempczinski said:

“2020 will be remembered as one of McDonald’s most challenging, yet inspiring, moments in our long history. The resilience of the McDonald’s System was on display – making safety and service a priority, putting our customers and people first, and running great restaurants.” 

ii round-up:

Restaurant icon McDonald's (NYSE:MCD) reported a fall in comparable global sales of 1.3% for the final quarter of 2020, up from a fall of 2.2% in the prior quarter, as it continued to push drive-thru and delivery sales under the pandemic. 

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But earnings of $1.70 per share was short of Wall Street forecasts for nearer $1.80, hindered by still falling sales overseas and heightened pandemic related costs. 

McDonald’s shares were little changed in US trading post the numbers, leaving them up around 50% since March 2020 lows. Shares for both KFC owner Yum Brands (NYSE:YUM) and Starbucks (NASDAQ:SBUX) are both up over 70% since March.

The Chicago headquartered burger chain operates over 39,000 outlets in more than 100 countries. Global comparable sales for the whole of 2020 fell by 7.7%, with earnings per share down a fifth to $6.31.

US sales gained by 5.5% in the quarter, but sales for its international and international developmental segments fell by 7.4% and 3.6% respectively.  

While the US business has benefitted from strong promotional activity, international and particularly European sales remained pressured because of Covid restrictions and more limited opening hours. Negative sales for its international developmental markets, mainly Asia and Latin America, were partially offset by strength in Japan. 

The fast-food giant previously announced a 3% increase in its quarterly dividend to $1.29 per share, up from $1.25 in the previous four quarters and equivalent to an annual payment of $5.16 per share. 

ii view:

McDonald’s generates revenue through company-owned restaurants, franchise royalties, and licensing pacts. Of its 39,000-plus restaurants, just over 36,000 operate on a franchisee or affiliate basis. Second-quarter results, under the heavy influence the pandemic and restaurant closures, saw it report a 67% fall in earnings per share year-over-year. As such, it has accelerated its Arches strategy to grow drive-thru and delivery sales as it expands its digital presence. 

For investors, ongoing pandemic uncertainty cannot be forgotten, and a new US government with plans to increase the minimum wage offers a cost challenge. An estimated one-year forward price/earnings (PE) ratio of over 30 is also comfortably above the three- and 10-year averages - suggesting the shares are not obviously cheap. 

But the company’s immense brand and value offering are hard to overlook. And although a dividend yield in the region of 2.3% is not blow away, it is reasonably attractive in an era of ultra-low interest rates. The company also boasts a record of consecutive annual dividend increases since 1976. In all, McDonald’s arguably remains worthy of a place in most diversified long-term portfolios. 

Positives: 

• Defensive value product offering
• Progressive dividend policy

Negatives:

• Uncertain Covid-19 outlook
• Subject to currency fluctuations 

The average rating of stock market analysts:

Buy