McDonald's (MCD -0.69%), the world's largest fast-food chain, is often considered a reliable stock for long-term investors. But over the past 12 months, the stock has stayed nearly flat as the S&P 500 has advanced nearly 24%.
Many investors shunned McDonald's as it grappled with slowing comparable store sales and an E. coli outbreak in the U.S. from September to October 2024. However, that slump might represent a golden buying opportunity for four simple reasons.
Image source: Getty Images.
1. Its slowdown is caused by temporary headwinds
McDonald's global comparable store sales declined year over year for two consecutive quarters. The growth of its U.S. business stalled out as its international operated and international developmental licensed markets grappled with declining comps.
|
Comps Growth by Segment |
Q3 2023 |
Q4 2023 |
Q1 2024 |
Q2 2024 |
Q3 2024 |
|---|---|---|---|---|---|
|
U.S. |
8.1% |
4.3% |
2.5% |
(0.7%) |
0.3% |
|
International Operated Markets |
8.3% |
4.4% |
2.7% |
(1.1%) |
(2.1%) |
|
International Developmental Licensed Markets |
10.5% |
0.7% |
(0.2%) |
(1.3%) |
(3.5%) |
|
Global |
8.8% |
3.4% |
1.9% |
(1%) |
(1.5%) |
Data source: McDonald's.
However, most of that slowdown was caused by temporary headwinds instead of any long-term existential threats to McDonald's core business. Its U.S. business was affected by inflationary headwinds for consumer spending, two major hurricanes, and an E. Coli outbreak. Its international business struggled with slower consumer spending in the U.K. and Europe, as well as the ongoing conflicts in the Middle East.
So if you plan to hold McDonald's stock for at least a few years, these near-term challenges shouldn't deter you from buying it today. From 2023 to 2026, analysts expect its revenue to grow at a compound annual growth rate (CAGR) of 4%.
2. It's resolving its most pressing issues
McDonald's is already taking plenty of steps to counter those near-term headwinds. In the U.S., it's launching the popular Chicken Big Mac across more regions, extending its $5 meal deal to attract more customers, and rolling out its mix-and-match McValue menu for a wider range of budget-friendly options.
On the company's latest conference call, CFO Ian Frederick Borden said McDonald's would also focus on "restoring consumer confidence" in the aftermath of the E. Coli outbreak from contaminated onions in 14 states. It still generated 41% of its revenue from the U.S. in the first nine months of 2024, so the stabilization of that core market could offset its other overseas challenges.
In Europe, it's expanding its cheaper McSmart menu to deal with inflation. In its latest call, Borden said the McSmart menu had sparked "signs of improvement" in France and attracted a "strong initial consumer response" in Germany. That progress should strengthen the international operated segment, which generated 48% of the company's revenue in the first nine months of 2024.
McDonald's international developmental licensed segment -- which includes its licensed stores in Latin America, China, and the Middle East -- will likely face more unpredictable macro and geopolitical challenges in the near future. But that segment only accounted for 11% of the top line in the first nine months of 2024 -- and it should stabilize over the next few years.
3. Tech upgrades will drive long-term earnings growth
McDonald's also continues to lock more customers into its global loyalty programs, which reached 150 million active members (who logged in within the last 90 days) at the end of 2023. It expects to reach 250 million members by the end of 2027.
As it locks in more customers, it's upgrading its digital platform with more personalized offers. It's also automating more locations to control its labor costs. Moreover, most of McDonald's locations are already franchised, so it generates most of its profits from those higher-margin royalties and fees instead of its company-owned stores.
Those advantages, along with consistent buybacks that reduced its share count by 25% over the past 10 years, should drive its long-term earnings growth. Analysts expect its EPS to grow at a steady CAGR of 6% from 2023 to 2026. At $292 a share, its stock still looks reasonably valued at 23 times forward earnings.
4. It's on the verge of becoming a Dividend King
McDonald pays a forward dividend yield of 2.4%, and it's raised that payout for 48 consecutive years. Another two dividend hikes will make it a Dividend King, an elite title reserved for companies that deliver at least 50 consecutive dividend hikes.
McDonald's ability to raise its dividend for nearly a half century indicates it's an evergreen investment that has weathered plenty of economic downturns. All those advantages make it a great stock for long-term investors to buy and hold.
