McDonald's Corp. (MCD, Financial) went through challenging times in fiscal 2016 with decline in comparable-store sales in the U.S. along with sluggish growth in emerging markets.
I must admit that I was also bearish at one point on the company’s long-term prospects. But the company’s outlook has change significantly in the last few quarters with several measures taken on the menu and customer satisfaction front.
These changes are reflected in the company’s quarterly numbers and the stock, which is higher by 31% year to date. McDonald's has more upside in the next few quarters with focus on the company’s latest quarterly results.
McDonald's offers a dividend payout of $3.76 per share that translates into a dividend yield of 2.4%. In the coming years, I expect the company to remain a classic dividend stock. In addition, investors are likely to benefit from the stock trending higher.
Comparable restaurant sales growth
McDonald's reported second-quarter numbers on July 25, and the stock surged on strong comparable-restaurant sales growth.
For the second quarter the company’s comparable restaurant sales in the U.S. increased by 3.9%. In the international lead segment, the comparable restaurant sales increased by 6.3%. Importantly, the company’s high growth segment witnessed comparable-restaurant sales increase by 7.0%.
Looking deeper into the numbers, the key factor that has translated into an increase in comparable restaurant sales is the menu.
McDonald's has made efforts to change its menu, and that has produced positive results. Just as an example, the company’s 3.9% increase in comparable-restaurant sales in the U.S. was driven by national cold beverage value promotion and the launch of the Signature Crafted premium sandwich platform. The company continues to innovate on the menu front, and that is likely to deliver results even in the coming quarters.
The following point from Steve Easterbrook puts things into perspective: "While we're encouraged by our results from the first half of 2017, we're not complacent.”
This is a key change for McDonald's in the turnaround story witnessed since fiscal 2016. The company has been experimenting more on the menu front along with initiatives to retain customers. While I talked about the U.S. and the factors that triggered comparable restaurant sales growth, the story is similar elsewhere.
In China, the company launched Chef Crafted burgers made with recipes from a Michelin star chef. Similarly, in France, the company’s affordable lunch on-the-go has been popular and driven growth.
The pricing factor has also played a crucial role in attracting customers and in the U.S., the $1.00 any size beverages and $2.00 McCafé drinks helped increase customer traffic. Similarly, in Australia, $1.00 hamburgers have worked in terms of driving an increase in volume.
Clearly, the company’s experiment with the menu and pricing has worked and translated into higher traffic. With efforts ongoing to provide higher customer value, I expect the positive trend to sustain.
Shareholder value creation
On May 24 McDonald's paid a quarterly dividend of 94 cents per share, and that translates into an annual dividend payout of $3.76 per share. I expect current dividends to sustain, and I expect dividend growth in the coming quarters. This is another factor that can potentially translate into stock upside.
For the first six months of fiscal 2017, McDonald's reported operating income of $4.3 billion as compared to operating income of $3.6 billion for fiscal 2016's comparable period. With strong growth traction, I expect operating cash flow to swell and this will translate into higher dividends and shareholder value creation through share repurchase.
Conclusion
McDonald's stock has surged year to date, and this upside has been backed by strong growth in global comparable-restaurant sales. With McDonald's working on a diversified menu along with efforts to increase customer satisfaction, it is likely that the growth momentum will sustain.
In addition, initiatives such as mobile order and pay and increase in home delivery in restaurants in the U.S. and globally are likely to help boost the top line.
One of the biggest positives for McDonald's in the recent past has been a proactive management, and that factor will play a key role in the growth trajectory going forward.
Disclosure: No positions in the stock
