McDonald’s Corporation (NYSE:MCD) shares surged at the end of January on the news that CEO Don Thompson would be stepping down. But now that the dust has settled, investors have to think critically about MCD stock outside of simply holding up Thompson as a scapegoat.
Yes, Thompson has presided over a lackluster two years or so at McDonald’s, with the S&P 500 jumping about 50% from when he took over in mid-2012 to the end of January while MCD stock went nowhere.
But if you think the CEO was the only issue, you’re fooling yourself.
Here’s why the Golden Arches are still tarnished, and why investors may want to consider using this short-term pop as a chance to sell their McDonald’s stock — not an excuse to buy more.
More McDonald’s Sales Woes
Shortly after the feel-good buzz around a new CEO, MCD stock got back to its old tricks by announcing global same-store sales fell 1.8% in January.
Clearly the headwinds are persistent and serious, with this latest news part of a bigger trend of declining same-store sales plaguing McDonald’s since about 2012.
MCD Stock Can’t Connect with Customers
If you want to correlate this sales trouble with Don Thompson’s leadership alone, be my gues t… but bigger trends are at work here including changing consumer tastes and a focus on healthier eating. MCD stock also ranks near the bottom in customer satisfaction for the industry, and surveys continue to show it losing out both among millennials and Baby Boomers alike.
Consider a Brand Keys survey from late 2014, showing that restaurants like Panera Bread Co (NASDAQ:PNRA) and Chipotle Mexican Grill, Inc. (NYSE:CMG) top the list of millennial favorites, as well as reporting a 18% drop in baby boomer visits to traditional “fast food” joints like McDonald’s and Yum! Brands, Inc. (NYSE:YUM) franchise Taco Bell.
Rebranding Isn’t Easy
Here’s where bulls point to Steve Easterbrook, the incoming CEO and current brand guru of McDonald’s, as the savior and a way to reshape the company’s future.
But rebranding a fast-food restaurant’s menu is incredibly difficult, with Kentucky Grilled Chicken and Burger King Worldwide Inc’s (NYSE:BKW) Satisfries just two examples of “healthy options” that work in theory but not practice. The bottom line is that McDonald’s is synonymous around the globe with fast, cheap food — not quality, healthy food — and changing that narrative is a daunting task for any exec.
McDonald’s Stock Faces Global Pressure
With some 14,000 restaurants in the U.S., it’s difficult for McDonald’s to expand. That’s why overseas markets are key. In fact, for fiscal 2014, McDonald’s derived less than a third of revenue from domestic operations — about $8.66 billion of $27.4 billion in total sales.
So while the U.S. brand challenge is important, the bigger issue is global headwinds. Given the risk of another recession in Europe and an economic slowdown in Asian markets like China, the global growth outlook for McDonald’s is more pressing than any U.S. rebranding effort.
Furthermore, as the company’s quarterly filing noted: “Foreign currency translation had a negative impact of $0.08 and $0.12 on diluted earnings per share for the quarter and year, respectively.” That is a big deal, because when sales are dropping, you can’t afford the double-whammy of unfavorable currency exchange rates holding back overseas profits even more.
Sadly for McDonald’s, the dollar remains very strong — and will hold back global sales going forward, too.
McDonald’s Dividend Growth is Over
The last glimmer of hope for MCD stock comes from its income potential, and it’s true that a 3.7% yield is nothing to sneeze at. But while some investors talk up the dividend, the sad truth is it’s unlikely that yield will rise significantly going forward. Consider that McDonald’s is currently paying $3.40 a year in dividends but projected to earn only $5.09 in earnings per share for 2015 — a 67% payout ratio.
The only hope for dividend growth is profit growth. And unless something remarkable happens, profits are unlikely to increase dramatically in the next few years.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write to him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.
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