McDonald's: On the Brink of Death?
What is everybody's beef with McDonald's?
by Rod D. Martin
July 27, 2015
So what is everybody's beef with McDonald's?
I tend to be pretty contrarian, so it won't surprise you that I remain unconvinced that McDonald's (NYSE:MCD) is near death. It's certainly not my favorite stock in the world. But as I see it, the piling on we're hearing is just making it tomorrow's bargain meal.
There's no question: the Big Mac is facing uncharted waters. I've written elsewhere about its labor troubles (and why they don't matter that much). But there are other issues, many of them, from poorly performing marketing initiatives to a stronger dollar, all adding up to declining same-store sales.
That's newsworthy, to be sure. It's especially so because it's new: we're not used to hearing about McDonald's having these sorts of troubles.
But is McDonald's really in decline, or even near death?
No.
McDonald's is the number one fast food vendor on the planet. It's worth $92 billion: that's Yahoo plus the Ford Motor Company with room for umpteen major newspapers. It has over 36,000 locations in 125 countries. It's every child's favorite destination, and many of us can still sing its yesteryear marketing jingles in our sleep.
It's not going anywhere.
The stock? Not bad. McDonald's 10-year return is an annualized 15.64%. Even if you reinvested all your dividends the S&P 500 clocked in at just 7.482% over the same period. The Dow did a little better at 8.144%, but that's still half of Mickey D. Shorter term, MCD is up 3.92% over the last 12 months, and 4.84% since the beginning of the year. The SPY is just 2.17%.
Looking at the company itself, revenue grew over the last decade from $20.46 billion to $27.44 billion, for a compound annual growth rate of 3.32%. Earnings per share in the same period grew from $2.04 to $4.82, for compound annual growth of 10.02%.
That ain't chicken feed. The naysayers will respond that that growth is slowing, and of course that's true. But analysts expect that slowed growth -- and did I mention it is still growth? -- to fall to around 7% over the next few years. That's Chinese GDP level growth, during a rough patch.
McDonald's is a key holding of pension funds and retirees for another reason: it has raised its dividend every one of the last 39 years. Not just paid it: raised it. The company now pays out 76.4% of its earnings to its shareholders. Indeed, McDonald's has increased that payout at an annual rate of 19.6% over the last decade. Add its current 3.6% yield -- much richer than the market as a whole -- to 7% expected growth in earnings per share, and wow.
Clearly a 76.4% payout ratio limits MCD's ability to keep increasing that number. But with a net margin of 19.59% (admittedly slipping a bit of late), this is a good company, period.
Would I buy right now? Certainly. While it might not hurt to let the media guys beat it up some more. It's a bargain in the low $90s, and would be a great part of a conservative portfolio aimed at long-term dividend income.
Growth is slowing. Part of that has been the Great Recession. But global population growth is slowing too: there aren't as many more people who still need access to a Chicken McNugget. That's a trend that will prove problematic for many big businesses over the next few decades (not all, but many): many western nations are actually shrinking, and population growth in much of the rest of the world is moderating fast. And McDonald's is already in most of those markets anyway.
So McDonald's is facing some adjustments to be sure. This is going to be a challenging decade. What it won't face is a near-death experience. And don't let anyone convince you otherwise.
