ii view: McDonald's profit win overshadowed by inflation

A staple of modern life with an enviable dividend track record. We assess prospects.

Fourth-quarter results to 31 December

• Global comparable sales up 12.6% 
• Earnings per share up 16% to $2.59 

Chief executive Chris Kempczinski said:

“Our Accelerating the Arches strategy is driving growth and building brand strength, delivering exceptional full year performance in 2022. While we expect short-term inflationary pressures to continue in 2023, we remain highly confident in Accelerating the Arches, which now includes a greater emphasis on new restaurant openings.”

ii round-up:

Restaurant titan McDonald's Corp (NYSE:MCD) today reported quarterly sales and earnings which beat Wall Street forecasts, but remains cautious about ongoing inflationary pressures. 

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Increased menu prices helped fourth quarter earnings rise 16% year-over-year to $2.59 per share, exceeding analysts estimates of nearer $2.44 per share. Cost pressures are, however, expected to continue into 2023, with total costs and expenses up 7% in 2022. 

McDonald’s shares fell in response having come into this latest news up by close to 5% over the last year. KFC owner Yum Brands Inc (NYSE:YUM) has gained by a similar amount, while the S&P 500 index has fallen by just over a tenth. 

McDonald's operates in more than 40,000 locations in over 100 countries. Like-for-like, or comparable sales for its International Developmental Markets region, including Japan, China and Brazil, gained most during the quarter, up 16.5% year-over-year.

Comparable sales for its home US markets division rose 10.3% in the period, with sales on the same basis for its International Operated business including Germany, France and Australia, growing 12.6%. That left overall group comparable sales up by the same amount.  

Earlier this year, McDonald’s announced a management reorganisation and series of job cuts, aimed at helping it focus on accelerating the rollout of new restaurants. Further details are expected in April. 

In October, McDonald’s declared a quarterly dividend of $1.52 per share, an increase of 10% over the prior quarter.

ii view:

McDonald’s generates revenue through company-owned restaurants, franchise royalties, and licensing pacts. Around 95% of its restaurants are owned and operated by independent local business owners. Its Arches strategy aims to grow drive-thru and delivery sales as it expands its digital presence. 

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For investors, as with businesses more generally, inflationary pressures remain an issue. A backdrop of rising interest rates and a cost-of-living crisis for consumers cannot be overlooked, while an estimated future price/earnings (PE) ratio above the 10-year average suggests the shares are not obviously cheap. 

More favourably, its value-based menu may now be even more attractive to cost pressured consumers. Management initiatives including accelerating the rollout of new outlets are now being pushed, while a record of increasing the dividend payment annually since 1976 is not to be overlooked.

On balance, and given its position as a staple in many consumers lives, McDonald’s looks to remain worthy of consideration for investors building a diversified portfolio for the long term.

Positives: 

• Defensive value product offering
• Progressive dividend policy

Negatives:

• Cost pressures
• Subject to currency fluctuations 

The average rating of stock market analysts:

Buy