McDonald's Continues to Perform on Multiple Levels

Strong financial results, consistent dividend increases and a robust balance sheet make this stock stand out

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Dec 05, 2022
Summary
  • McDonald’s has consistently increased revenues, same-store sales and digital sales.
  • A recent dividend hike puts the fast-food giant closer to becoming a Dividend King.
  • Strategic partnerships will also help, such as the one with Krispy Kreme.
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Since its founding, McDonald's (

MCD, Financial) has become one of the most recognizable brands in the world. And while the company has faced its fair share of challenges over the years, it has consistently performed well financially. This consistent performance has made McDonald's a steadfast star in a volatile market. While other companies have struggled to keep their businesses afloat, McDonald's has continued to thrive. This is partly due to the company's strong brand recognition and loyal customer base, but it is also thanks to the low prices and innovative spirit.

Even during tough economic times, McDonald's has found new ways to grow its business. For example, the company has recently expanded its delivery and digital ordering offerings and established new partnerships. As a result of these efforts, McDonald's is well-positioned for continued success in the years ahead.

McDonald's hits it out of the park in the third quarter

In its earnings report for the third quarter, McDonald's reported impressive sales of $5.87 billion, which was down by 5% year-over-year but still beat analyst estimates. The year-over-year decline in revenue was attributable to the effect of the strengthening of the U.S. dollar on revenue from countries abroad and the decline in sales in China due to the ongoing Covid restrictions.

The company beat analysts' revenue estimates despite hiking menu prices by 10%. The introduction of a happy meal for adults, the "Cactus Plant Flea Market Box," was wildly popular in the U.S. and boosted sales in the country. Within the first few days of its launch, around half of the toys were sold out. As reported by Placer.ai, McDonald's locations saw an increase in foot traffic of 37.1% year-over-year the week the collectibles were debuted.

The global comp sales growth beat estimates of 5.8%, up by 9.5% compared to the same period last year, with growth mainly coming from the U.S., Germany, Australia, Japan, Latin America and France. One important driver of sales growth was digital sales of company-owned and franchisee-owned locations, which was approximately $7 billion, and accounted for a third of the total systemwide sales. The growth is owed to the corporation's excellent marketing strategies and the push toward adopting digitization across all its segments.

Importantly, the fast-food giant is now back in business in Ukraine. In August, McDonald's said it would reopen some of its restaurants in Ukraine by the end of 2022. It had previously closed down locations after Russia invaded Ukraine. The war also prompted the company to sell 850 restaurants in Russia in May. Exiting Russia cost McDonald's 7% in revenue, while its systemwide sales and operating income were slashed by 2% each.

McDonald's reported adjusted earnings per share of $2.68, outpacing the $2.60 estimates by analysts. There was a decline of 18% year-over-year to $2.1 billion in company-owned restaurant sales, but franchisee-owned locations impressed investors with $3.7 billion in sales, up by 5%.

McDonald's app will help power the future

In recent years, the company has been working to modernize its image and appeal to a wider range of customers. A key part of this effort has been the introduction of the McDonald's app. The app has been a huge success, with over 25 million active users in the United States alone. Thanks to its popularity, McDonald's has expanded its loyalty program to 50 markets worldwide. There's no doubt that the McDonald's app has been a game-changer for the company – and it looks like it will continue to be a key part of McDonald's success for years to come.

Strategic partnerships powering McDonald's forward

Consumers in Louisville were thrilled when McDonald's announced that it would be selling Krispy Kreme (

KKD, Financial) donuts at nine locations in the city. Adding Krispy Kreme donuts to the McDonald's menu is a welcome bonus for many customers.

This smart move by McDonald's gives the company an edge over competitors in the battle for holiday customer traffic. If successful, this could lead to Krispy Kreme donuts being sold nationwide at McDonald's.

According to Bank of America (

BAC, Financial) analysts, the partnership could yield more than $350 million in sales if successful. They estimate that McDonald's revenue share would be 25% and incremental earnings before interest and taxes would be $111 million through incremental sales of 30%.

A dividend aristocrat on the way to becoming a king

In October, McDonald's announced a 10% increase in its quarterly dividend to $1.52 per share. McDonald's dividend payout ratio is 2022 is just under 57%, and the annual payout is $6.08 per share. The company has free cash flow of $1.903 billion, and around 75% of its free cash flow goes out as dividends, which means that after deducting dividends, the company is still left with a free cash flow of $789 million.

McDonald's has increased its dividend every year since the company started paying dividends in 1976. The company is a Dividend Aristocrat since it has paid out dividends yearly for at least 25 consecutive years and raised its dividend each year. It is just now a few years away from becoming a Dividend King.

Takeaway

McDonald's has a long history of beating analysts' estimates when it comes to its financials. The company has been expanding its business worldwide and has repeatedly proven that it can come out of recessions victorious and overcome headwinds.

McDonald's has a strong brand presence, a solid track record of financial performance and a growth-oriented business model. This stalwart is well-positioned to continue its slow but steady growth trajectory in the coming years, in my view.

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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