ii view: McDonald's at new high after incredible run

by Keith Bowman from interactive investor |

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This iconic company is still battling the pandemic but is confident enough to again raise the dividend. 

Third-quarter trading update to 30 September

  • Comparable sales down 2.2% 
  • Quarterly dividend up 3% to $1.29 per share 

Chief executive Chris Kempczinski said:

“Our third quarter performance demonstrates the underlying resilience of the McDonald’s brand. Our unique strengths, including our unrivalled Drive Thru presence around the world, advanced delivery and digital capabilities and marketing scale have become even more important during the pandemic.” 

ii round-up:

Fast-food chain McDonald’s(NYSE:MCD) has announced a more modest decline in global sales of 2.2%, as drive-thru stores reopened under eased pandemic restrictions and special promotions enticed consumers. 

This was a vast improvement on the 23.9% fall suffered in the lockdown-hit second-quarter period. Sales growth of 4.6% in the US helped to compensate for sales falls across international markets such as the UK, France, Spain, and Germany. 

McDonald’s shares rose by around 1% in pre-market US trading following the news and are up by over 60% since pandemic-induced lows back in late March. Shares of Starbucks (NASDAQ:SBUX) and KFC owner Yum Brands (NYSE:YUM) are up by similar amounts. 

McDonald’s operates over 39,000 outlets in more than 100 countries. Its US quarterly sales gain of 4.6% included a double-digit increase in September, aided by heavy promotional activity, although that was still down on the 4.8% gain made in the third quarter of 2019. 

Overseas sales, such as those in Europe, fell by 4.4% compared to a gain of 5.6% in Q3 2019, although progressively improved through the quarter as social distancing restrictions eased. 

Sales for its international developmental markets like Latin America and China fell by 10.1% compared to a gain of just over 8% this time last year. 

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

ii view:

The Chicago headquartered company 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. 

Like so many other companies, 2020 has been like no other for this restaurant mammoth. Second-quarter results under the heavy influence of global pandemic lockdowns and restaurant closures meant the company reported a 67% fall in earnings per share year-over-year to $0.65. Although it maintained its quarterly dividend payment, at the time, of $1.25 per share. 

For investors, ongoing pandemic uncertainty and a current 'second wave' offer some reason for caution. An estimated forward price/earnings (PE) ratio close to 40 and comfortably above the three- and 10-year averages in the 20s, suggesting the shares are not obviously cheap. But the company’s immense brand and value offering are hard to overlook. And, while a dividend yield in the region of 2% is not overly generous, it is reasonably attractive in an era of ultra-low interest rates and there have been consecutive annual 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

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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