It has been a full decade since the last recession in the U.S. The stock market, as measured by the S&P 500 index, has been on a virtually uninterrupted run higher over the last 10 years. For investors wanting to prepare themselves in case the next market downturn is around the corner, McDonald’s (MCD, Financial) is a top candidate to consider.
Fast food is an industry that typically holds up very well during recessions, as cash-strapped consumers tend to scale down their spending when times are tough. McDonald’s is one of the top fast food stocks for dividends and growth.
McDonald’s also performed exceptionally well during the last recession. In fact, McDonald’s was only two stocks in the Dow Jones Industrial Average to increase in value in 2008, along with retail giant Walmart (WMT, Financial).
McDonald’s might be the best stock to own during the next recession.
Business overview
McDonald’s is the largest publicly traded fast food company in the world, with more than 37,000 locations, in more than 100 countries. For the 2018 first quarter, McDonald’s had earnings per share of $1.79 on revenue of $5.14 billion. Comparable sales, which measures sales at locations open at least one year, increased 5.5% in the first quarter.
In the U.S., McDonald’s largest segment, comparable sales were up 2.9% year over year. Comparable sales for the International Lead segment increased 7.8% for the quarter, primarily driven by the U.K. and Germany. In the High Growth segment, first quarter comparable sales increased 4.7%, led by strong performance in China and Italy.
The main drivers of McDonald’s growth are refranchising and new menu offerings. Refranchising increases profitability, as it provides a steady stream of cash flow to the parent company, while placing greater expenses on the franchisee. According to McDonald’s global growth plan, the company expects to have over 90% of its global restaurants franchised by the end of 2018.
In addition, McDonald’s has revamped its menu offerings. In the first quarter, the pricier Signature Recipe Burgers provided higher profit margins, while the new $1/$2/$3 Dollar Menu offerings drove transaction growth. The strategy has clearly paid off — McDonald’s has now racked up 11 consecutive quarters of positive comparable sales.
Competitive advantages and recession performance
McDonald’s is firing on all cylinders, and its strong performance should continue in the years ahead, even if the U.S. economy enters a recession. McDonald’s enjoys several competitive advantages that separate it from its industry peers. As the largest publicly traded fast food company in the world, it has enormous scale, which allows it to keep prices low.
And it has a very strong brand. According to Forbes, McDonald’s is the No. 11 most-valuable brand in the world, worth over $40 billion. When the economy takes a downturn, consumers tighten their belts, particularly when it comes to dining. Rather than go to higher-priced sit-down restaurants, consumers will often shift down to fast food during a recession.
This is why it could be argued that McDonald’s actually benefits from recessions. Consider its financial performance during the Great Recession — McDonald’s grew its earnings per share by 26% in 2008, 8% in 2009 and 16% in 2010. McDonald’s grew earnings in each year of the recession, and averaged double-digit growth over those three years. at a double-digit compound annual rate. This is clear evidence of its recession-resistant business model.
In addition, McDonald’s has a 2.5% dividend yield, and is very likely to continue increasing its dividend each year. Its attractive dividend yield and dividend growth would further boost investor returns if the broader stock market enters a downturn.
I expect McDonald’s to grow earnings per share by approximately 6% through 2023. In addition to the 2.5% dividend yield, McDonald’s stock could return 8.5% per year over the next five years, and its returns should hold up even if the U.S. enters a recession.
Disclosure: I am not long any of the stocks mentioned in this article.
