McDonald’s: The Big McPullback Is A Chance To Buy This Upcoming ‘Dividend King’
Contributor since 2011 / 12845 Followers
Summary:
- The recent decline in McDonald’s stock presents a buying opportunity for longer-term and shorter-term investors.
- Reasons for the recent pullback include profit-taking, earnings miss, and concerns about consumer spending.
- McDonald’s could become a “Dividend King” and has growth drivers like menu innovation, decline in U.S. Dollar, and AI benefits.
franswillemblok/iStock Editorial via Getty Images
My last article about McDonald’s (NYSE:MCD) was way back in 2015, and in it I suggested it might be a good time to take advantage of a recent spike in the stock by selling it. I like to sell spikes and buy dips so now I am suggesting the exact opposite since this stock has recently dropped quite a bit. I think this current pullback might be a chance for longer-term investors to buy this stock. This could also be an attractive trading opportunity for shorter-term investors to buy this pullback and possibly be positioned for a potential rebound.
There are a number of reasons why I think the recent decline in this stock is a buying opportunity, most of which are fundamental, but I also see technical reasons to buy this stock now when I look at the chart. With this in mind, let’s take a closer look:
The Chart
As the chart below shows, this stock bottomed-out at around $245 per share in October of last year. It then rallied back to just over $300 in early 2024, but has since declined back down to right around the same $246 per share levels it held in October, 2023. This level was where it hit rock-bottom and then bounced off of last year. So it might be poised to do the same now that it is at this level and potentially having formed a very bullish double-bottom on the chart. Because the $245 level was the bottom late last year and because it could be finding strong support at this same level now and forming a bullish double-bottom, I see this as a fairly strong technical reason to buy this stock.
FinViz.com
The Reasons I See For The Recent Pullback
I see a number of reasons why McDonald’s shares have declined recently. One big reason could be that this stock simply got ahead of itself when it traded to just over $300. That level did not hold, potentially because of profit-taking and sometimes large round numbers like $300 can serve as short term tops.
On April 30, 2024, McDonald’s reported first quarter results, and there was a slight miss of $0.03 per share on the non-GAAP earnings per share which came in at $2.70, instead of the consensus estimates of $2.73 per share. Revenues came in at $6.17 billion which was a 4.6% year-over-year increase. Overall, it was a solid quarter, but any type of miss is not typically well received by the markets, especially when a stock recently hit highs of just over $300.
Another reason that explains the recent weakness in McDonald’s shares is because of new signs that the lower end consumer might be under pressure. Other food and beverage industry stocks have also been declining and some have recently experienced weaker spending trends. For example, Starbucks (SBUX) shares have also recently declined over concerns about consumers cutting back on spending and weaker foot traffic. Job growth has been slowing down recently and this could be a concern in terms of consumer spending. Auto loan delinquencies are rising and credit card debt has recently reached record levels. This suggests some consumers are under pressure right now even when unemployment is relatively low. I believe all of these factors are weighing on the stock, but I also feel these concerns about consumer spending could be overblown because McDonald’s does provide a lot of value and it has a number of low cost items. Because of this, I view McDonald’s as a relatively recession-resistant business model.
McDonald’s Is A Dividend Aristocrat, But It Could Become A “Dividend King”
A “Dividend Aristocrat” term applies to a company if it has raised its dividend for 25 consecutive years or more. McDonald’s is currently a Dividend Aristocrat, but since it has raised its dividend for 48 consecutive years, it is going to potentially become a “Dividend King” which is a term that applies only after a company has raised its dividend for 50 years or more. There are only about 54 companies that make the current Dividend King list, and relatively soon McDonald’s could become a dividend king.
McDonald’s last dividend increase was declared in October 2023, when it raised the quarterly dividend from $1.52 per share to $1.67 per share. In the past few years, dividend increases have been announced in the fourth quarter, so if this pattern repeats, McDonald’s is on the path to becoming a dividend king relatively soon. McDonald’s has been raising the dividend every year since 1976, and this means the company is less than 18 months away from becoming a dividend king. Obviously, there is time before this happens, but I believe it is something to consider now, especially with the share price way below recent highs.
Here Are A Number Of Growth Drivers And Upside Catalysts I See For McDonald’s
Menu Innovation: It looks like McDonald’s is already addressing the need for value that some consumers are increasingly demanding. The company recently announced a $5 meal deal that allows customers to pick 4 items for $5. This type of value offering will likely boost traffic for McDonald’s and remind consumers of the value proposition that this company offers. For many families it is difficult to even cook a meal with multiple items at home for less than $5 per person. In addition, I see this $5 meal deal as pulling many consumers towards McDonald’s and away from other fast food competitors.
A Decline In The U.S. Dollar: The European Central Bank or “ECB” recently lowered interest rates for the first time in years. Meanwhile, the U.S. Federal Reserve has been delaying interest rate cuts. Higher interest rates are supportive to the U.S. Dollar and a strong dollar hurts U.S. based companies with significant revenues from overseas. McDonald’s derives about 59% of its revenues from outside of the United States and this means it is significantly impacted by a strong dollar.
Even though the Federal Reserve appears to be acting tough on rate cuts right now, their own projections suggest that the Fed Funds rate could drop from around 5% today to about 3% between now and 2026. This would represent a roughly 40% decline in interest rates and it would make holding U.S. Dollars in money market accounts, far less attractive for global companies and investors. This could lead to a big decline in the dollar and that would lead to much stronger profits for multinational companies like McDonald’s in the future. This dynamic could be a big growth driver for earnings at McDonald’s in the coming years. Also, related to the drop in interest rates, if money market rates drop to about 3% between now and 2026, the dividend yield of nearly 3% that McDonald’s currently offers will be far more attractive to investors. This could lead to a higher share price in the future as well.
A New Concept: McDonald’s recently launched CosMc’s and it is now expanding this new concept. So far the CosMc’s concept of offering specialty hot and cold drinks and premium snacks seems to be promising. I think it is still too early to tell if this is a viable long-term concept with national and international potential. If it does prove to be successful, it could compete with Starbucks and other popular coffee and quick meal companies.
McDonald’s Is An AI Beneficiary: McDonald’s has a very large employee base and with all the regulations and expenses that come with having employees, it makes sense to automate the meal preparation and ordering process as much as possible. Analysts at Morgan Stanley (MS) recently put out a list of companies that could see big productivity gains from AI and McDonald’s was on the list. I see huge potential for humanoid robots in the next few years and these robots could transform operations and significantly lower payroll, insurance and other costs. Some of the most brilliant tech company founders and CEO’s are investing many millions of dollars into building humanoid robots.
As I point out in this recent article, the list of tech billionaires pursuing humanoid robots includes Jeff Bezos, Elon Musk and Jensen Huang of Nvidia (NVDA). Obviously, I don’t see this as having an immediate impact for McDonald’s but the market is forward looking and the impact for companies like McDonald’s is likely to be profound when it does occur. I believe that buying now before more investors are contemplating the idea that humanoid robots could greatly lower labor costs for McDonald’s makes sense. I believe waiting until it’s all happening and humanoid robots are taking and preparing your order will mean losing this opportunity.
Earnings Estimates And The Balance Sheet
As the consensus estimates shown below suggest (as provided by Seeking Alpha), analysts expect solid earnings per share growth over the next couple of years. I believe that earnings beyond 2026 could accelerate even further, thanks to AI and the potential for humanoid robots to greatly reduce labor costs for this company.
Earnings Estimates
|
FY |
EPS |
YoY |
PE |
Sales |
YoY |
|---|---|---|---|---|---|
| 2024 |
12.20 |
+2.16% |
20.15 |
$26.62B |
+4.42% |
| 2025 |
13.25 |
+8.66% |
18.55 |
$28.14B |
+5.71% |
| 2026 |
14.36 |
+8.33% |
17.12 |
$29.80B |
+5.90% |
As for the balance sheet, McDonald’s has just under $51 billion in debt and about $838 million in cash.
The Dividend And Share Buybacks
McDonald’s has been consistently increasing the dividend for many years. It currently pays a quarterly dividend of $1.67 per share. This totals $6.68 per share on an annual basis, and it provides a yield of nearly 3%. This yield could become even more attractive going forward because I expect the Federal Reserve will lower rates over the next couple of years. Lower interest rates could make dividend stocks even more attractive in a lower rate environment. This could lead to higher share prices for dividend stocks.
During the first quarter of 2024, McDonald’s repurchased about $918 million worth of its shares. This is in line with the longstanding history this company has when it comes to stock buybacks.
Potential Downside Risks
Like any stock, there are macro risks that could result in downside for shareholders. This includes a general stock market correction, geopolitical issues, regulations, rising labor costs and more. More specific risks for McDonald’s include the very competitive industry that it operates in, as well as the trend for people to try to make healthy foods a bigger part of everyday life.
One of the recent geopolitical issues has been a backlash in the Middle East over the U.S. support of Israel. This has recently led to McDonald’s agreeing to buy around 225 restaurants in Israel from the franchisee.
The boom in weight-loss drugs has caused some analysts to question if this will result in lower food consumption. It is still too early to tell, but this is a potential downside risk to consider.
In Summary
There are some downside risks and challenges, but overall, I see multiple growth drivers for this company and the stock. McDonald’s has a very resilient business model, and it is an iconic business in the food industry. It has been a winning investment over many years, and could continue to be so as the company expands and invests in new concepts and menu innovations. In the not too distant future, McDonald’s could become a dividend king, and that could attract many dividend stock investors as well as new buying from ETFs and mutual funds that are based on dividend king stock investing.
I also see McDonald’s as a big beneficiary of AI, primarily when AI software converges with hardware which will ultimately allow for the rise in humanoid robotics. I believe the implications of this will be astounding in terms of impacting our everyday life and for businesses as well, as they could see massive drops in labor costs. For all of these reasons, I see McDonald’s as a strong buy now, but also because this stock is trading at the level that it bottomed-out at last year. I believe that investors who buy now will be benefiting from the recent pullback as well as the significant potential this stock has in the future from its status potentially changing to a dividend king, as well as the potential it has in the future thanks to AI and humanoid robotics.
No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of MCD either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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