The restaurant chain looks appealing after its recent stock-price pullback.
If you're hungry for a cheap stock to put in your portfolio, you're in luck. McDonald's (MCD -0.41%) shares have sat out of the market rally in the past year, barely rising since March 2023 compared to the 31% spike in the S&P 500. That performance is a bit surprising given that the fast-food titan was setting records around sales and earnings heading into early 2024.
There are some clouds on the horizon, to be sure. McDonald's noticed weaker spending and sluggish customer traffic in the core U.S. market over the last few weeks, and competition is heating up for those more cost-conscious shoppers. Rivals like Chipotle are targeting McDonald's industry lead in the drive-thru channel, and there are more pricing pressures now that inflation has slowed down.
Don't let these worries keep you away from the stock. McDonald's has all the ingredients necessary to generate solid returns from today's discounted share price. Let's look at some of the key reasons to love the stock right now.
1. Cash flow
If I had to pick a single metric to judge a stock against, then cash generation would rank near the top of the list. As the saying goes, "Cash flow is destiny." This metric is even more important for a dividend stock like McDonald's, because its payout is ultimately funded by cash production.
McDonald's -- and its dividend -- has a bright future ahead. The chain generates more cash than rivals thanks to assets like its huge global sales footprint and massive brand power. McDonald's produced $7 billion of free cash last year, up significantly from 2022 and translating into roughly 85% of earnings. The company's highly franchised selling model means it has a light annual spending commitment as compared to a business like Chipotle, which owns most of its stores outright.
It's no surprise, then, that McDonald's can pay (and steadily increase) a quarterly dividend. The last raise was 10%, and its cash flow trends imply further big hikes ahead.
2. Profit margin
McDonald's makes a lot of money by selling affordable fast food. In fact, its profit margin is approaching a record 50% of sales right now, far above Chipotle and other peers. A lot of that gap can be explained by its franchise-selling setup. McDonald's generates much of its earnings through high-margin royalty, real estate, and rental fees, and these revenue streams are much more profitable than traditional markups on food sales.
MCD Operating Margin (TTM) data by YCharts
The two main ingredients to awesome long-term returns are a high profit margin plus ample opportunities to generate good returns on those earnings. McDonald's has no shortage of growth initiatives, which lately have included a push to boost customer satisfaction by reducing wait times and improving product quality. There's also a big opportunity around online ordering and delivery.
3. The price is right
The best news is that investors have a chance to supersize their investments in McDonald's right now thanks to the pessimism surrounding the fast-food giant's shares. The company said customer traffic dipped into negative territory at the start of 2024, raising fears that comparable-store sales gains will slow to a crawl this year. That spooked Wall Street, and now the stock is valued at 8 times sales, down from over 9 times sales at a few points in 2023.
Traffic is the metric to watch, then, as the most impactful factor influencing the shares in the short term. But patient investors can look past that noise and focus on McDonald's excellent prospects for earnings growth over the next decade or more.
Demitri Kalogeropoulos has positions in Chipotle Mexican Grill and McDonald's. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
FAQs
The dividend yield of 2.5% is substantially higher than the S&P 500 average of 1.4%, and its long track record of dividend increases is compelling.
Is McDonald's a good buy right now? ›
Is MCD a Buy, Sell or Hold? McDonald's has a consensus rating of Moderate Buy which is based on 19 buy ratings, 10 hold ratings and 0 sell ratings. The average price target for McDonald's is $304.21. This is based on 29 Wall Streets Analysts 12-month price targets, issued in the past 3 months.
What are the 10 best stocks to buy according to Motley Fool? ›
The Motley Fool has positions in and recommends Alphabet, Amazon, Chewy, Fiverr International, Fortinet, Nvidia, PayPal, Salesforce, and Uber Technologies. The Motley Fool recommends the following options: short June 2024 $67.50 calls on PayPal. The Motley Fool has a disclosure policy.
What if you invested $1,000 in McDonald's 10 years ago? ›
Currently, McDonald's has a market capitalization of $208.66 billion. Buying $1000 In MCD: If an investor had bought $1000 of MCD stock 10 years ago, it would be worth $3,019.74 today based on a price of $288.95 for MCD at the time of writing.
What is the future of McDonalds stock? ›
Stock Price Forecast
The 24 analysts with 12-month price forecasts for McDonald's stock have an average target of 316.29, with a low estimate of 287 and a high estimate of 355. The average target predicts an increase of 22.54% from the current stock price of 258.11.
Is McDonalds a good growth stock? ›
McDonald's is still a quality stock to own for the long term, particularly for dividend investors. Its dividend, which yields 2.5%, remains safe, and in the long run the company will bounce back and its growth rate should recover.
What is McDonald's #1 seller? ›
The Most Popular Thing at McDonald's Is…
Ever since the first McDonald's menu from when the chained opened in the 1950s, french fries have been a star. The famous Golden Arches sell upward of 9 million pounds of fries per day!
What stocks are strong buys? ›
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| Microsoft (MSFT) | 1.33 | Strong Buy |
| Bio-Techne (TECH) | 1.39 | Strong Buy |
| Alexandria Real Estate Equities (ARE) | 1.39 | Strong Buy |
| Emerson Electric (EMR) | 1.39 | Strong Buy |
21 more rowsCash-strapped consumers, bad weather and challenges overseas are adding up to a slow start to 2024 at McDonald's, the company said. Lower-income consumers increasingly have spent their savings and are turning to grocery stores instead of restaurants, McDonald's CFO Ian Borden said Wednesday at an investor conference.
What is the rule of 72 Motley Fool? ›
Let's say that you start with the time frame in mind, hoping an investment will double in value over the next 10 years. Applying the Rule of 72, you simply divide 72 by 10. This says the investment will need to go up 7.2% annually to double in 10 years. You could also start with your expected rate of return in mind.
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| Alphabet Inc. (GOOG, GOOGL) | 12.2% |
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6 more rowsApr 26, 2024
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Why McDonald's is a good investment? ›
The consistency of McDonald's revenue and subsequent cash flow supports one of the stock market's best-pedigreed dividends. The fast-food chain's brand names and logos are recognized worldwide, which it leverages brilliantly.
What is the highest McDonald's stock has ever been? ›
McDonald's - 54 Year Stock Price History | MCD
- The all-time high McDonald's stock closing price was 298.82 on January 19, 2024.
- The McDonald's 52-week high stock price is 302.39, which is 17.2% above the current share price.
- The McDonald's 52-week low stock price is 245.73, which is 4.8% below the current share price.
For example, if an investment scheme promises an 8% annual compounded rate of return, it will take approximately nine years (72 / 8 = 9) to double the invested money.
Why McDonalds is a good business? ›
McDonald's success can be attributed to a combination of factors, including its strong brand recognition, focus on customer experience, menu innovation, and franchise model.
What advantage does McDonalds have? ›
Cheat prices is McDonald's main competitive advantage. The company is engaged in an extensive utilization of economies of scale to achieve the cost advantage. True to 'fast food' format of its restaurants, McDonald's is famous for the speed of customer service without compromising the quality of the service.
What is so great about McDonalds? ›
McDonald's quality is consistent worldwide
While the flavor varies ever so slightly, the quality remains strong. International locations also offer the same core menu items like Big Macs and Quarter Pounders, so you can rely on these staples no matter where you go.
Why is McDonalds the best brand? ›
McDonalds across the world have one huge advantage over other fast food chains. They have incredibly strong quality control and their products are consistent, no matter where you are. You can guarantee the quality of food you get at McDonalds will be pretty much as you expect anywhere in the world. No surprises.
