McDonald's Stock a Treat for Dividend Investors

What you need to know about McDonald’s stock before Nov 9 earnings report

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Fast food icon McDonald’s Corporation (NASDAQ:MCD) is set to report earnings before the open on Monday November 9 and will look to recover from its underperforming second-quarter earnings report. MCD is up only 6% year-to-date, but has tacked on a massive 73% from its 52-week low.

McDonald’s has a market cap of $159.89 billion and a book value of -$12.72 per share.  The company has a trailing price-earnings (P/E) ratio of 34.06 and a forward P/E ratio 26.04. McDonald's P/E ratio at the moment is 33.96.

Looking into its recent earnings history, McDonald’s has beat expectations only once in its last four earnings reports.  McDonald's best performing quarter in the past twelve months was the third quarter of 2019, despite missing expectations by 5%. The company reported an EPS of $2.11, instead of the expected $2.21. After that, McDonald's beat its expectations in the fourth quarter of 2019 by $0.01, reporting an EPS of $1.97. In its most recent quarter, the company missed their earnings target by 11%. The company reported an earnings per share (EPS) of $0.66 instead of the expected EPS of $0.74. For the report due out on November 9, McDonald’s is expected to boost its EPS to $1.90. For reference, the company has a trailing 12-month EPS of $6.33.

McDonald’s has seen a $5.5 billion decrease in revenue since 2016. The company went from producing $24.62 billion in revenue to $19.12, representing a 32% drop over a 4-year span. Aside from 2019, the company’s revenue have decreased annually since 2016.

McDonald's has performed much better as far as its bottom-line profit over the past four years. The company increased its net income by 29% between 2016 and 2019. Net profits totaled $6.025 billion in 2019. McDonald’s has seen its net income drop significantly over the past 12 months. The company has only produced $4.77 billion, which represents a 21% decrease.

McDonald’s currently has $3.26 billion in cash and $51.92 billion in total debt. The company’s balance sheet last had $47.51 billion in total assets and $55.72 billion in total liabilities. McDonald's total equity stands at -$8.21 billion. One of the most intriguing selling points for investors right now is MCD stock's dividend. McDonald’s has a forward dividend of $5.16 and a yield of 2.38%. The company has paid investor dividends since 1976. McDonald's increased its dividend to $1.29 for the third quarter of 2020 (a 3% increase).

McDonald’s seems likely stay at the top of the fast-food industry well into the foreseeable future. The company has been heavily spending on expanding its business as recently as 2019. In general, it is difficult to see a future where McDonald’s isn’t profitable. The company should have no problem raising capital when/if it needs it. McDonald's can also reduce its debt load significantly if the company makes it a priority.

The main concern here is that it would likely take at least 10 years for the company to reduce its debt enough for the balance sheet to be in good standing. McDonald's also has presented investors with concerns regarding consistent revenue growth. While the inconsistency is understandable for companies that have fulfilled the majority of their growth potential the way that McDonald’s has, it is still a red flag in general for investors.

Investing in this company comes with few risks, even with its negative equity. However, McDonald's appears to just be too big to fail. Overall, investors should manage their expectations for MCD stock growth from current pricing, and investors should be looking at MCD as a solid dividend play.

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