Source: PaxForex Premium Analytics Portal, Fundamental Insight
With the right approach, dividend growth investing is a versatile strategy. This means that an investor's portfolio should generate a steady, growing passive income, no matter what happens in the world. A portfolio of dividend-paying stocks should also be better than the broad market during market sell-off.
One stock that matches this portrayal is the dividend aristocrat McDonald's, which has increased its dividend for 46 consecutive years. And while the S&P 500 Index has fallen 14% in a year, McDonald's stock has dropped only 7% in that time.
But should investors buy this stock now? Let's look at McDonald's fundamentals and valuation to answer that question.
McDonald's reported revenues of $5.7 billion in the first quarter, an increase of 10.6% from a year ago. What's behind this major company's rapid revenue growth?
In the first quarter, global comparable restaurant franchise sales grew 11.8% year over year. Growth in comparable sales in each of McDonald's three segments drove the company's overall results higher this quarter.
Strategic menu price increases and growth in digital channels led to a 3.5% increase in comparable sales in the U.S. segment (which includes both company-operated and franchised restaurants). Digital channel growth was driven in large part by 26 million active MyMcDonald's incentive program participants in the first quarter. By comparison, this program has been built from the ground up since its launch last July.
Continued loosening of coronavirus restrictions guided to a 20.6% increase in like-for-like sales in the international markets in which the companies operate. Exceptional growth in comparable sales in Japan and Brazil offset increases in COVID-19 and restrictions in China in international licensing markets. This led to a 14.7% increase in comparable segment sales.
The closures of McDonald's locations in Russia in mid-March and Ukraine in late February clarify why revenue growth lagged behind comparable sales growth.
As a result, McDonald's recorded $2.28 non-GAAP (adjusted) diluted earnings per share (EPS) in the first quarter. That's equivalent to an 18.8% increase from a year ago.
In addition to the company's revenue growth, such outstanding earnings increase was the result of two factors. McDonald's non-GAAP net margin increased 210 basis points year over year to 30.1% in the first quarter. And thanks to its share repurchase program, the company's weighted average number of diluted shares fell 0.5% to 747.6 million in the first quarter.
Thanks to McDonald's evolving compensation program, analysts expect the company to deliver 7.7% annual earnings growth over the next five years.
McDonald's growth prospects aren't the only thing to like about the company's stock. Just four years separate the restaurant franchise from 50 years of consistent dividend growth, making it the dividend king.
With a dividend payout ratio of about 57% in 2022, McDonald's retains enough cash to expand its business, repurchase stock, and pay down debt. Thus, it's just a matter of time before the stock rises to royalty status. That's why we think the dividend will increase together with earnings.
The market's best dividend yield of 2.2% and dividend growth potential of several dozen times a year make the stock the undisputed titan of dividend growth.
At the stock's current price of $250, its projected price-to-earnings ratio (P/E) is 25.3. That's not so cheap compared to the 20 times projected P/E ratio in the consumer staples sector. But McDonald's is the cream of the crop, so it would be idealistic to anticipate the stock to trade at a less than deserved premium to its competitors.
As long as the price is above the 245.00 level, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 251.58
- Take Profit 1: 260.00
- Take Profit 2: 270.00
Alternative scenario:
If the level of 245.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 245.00
- Take Profit 1: 235.00
- Take Profit 2: 228.00
