Never underestimate a good dividend. For that matter, never underestimate a quality company, brand and stock either. McDonald’s (NYSE:MCD) fits all of these criteria. That’s why it’s no surprise that McDonald’s stock is hitting new all-time highs.
Even better, though, is that the thesis behind owning the stock doesn’t depend on these new highs.
McDonald’s is not a high-growth chipmaker or a robust software stock. But it’s a dependable business that has been churning out burgers, fries and profits for decades now. This is one of my top accumulate-and-hold stocks out there.
The Pandemic and McDonald’s Stock
Of course, during the novel coronavirus outbreak, like most businesses McDonald’s was negatively affected. But the world hasn’t experienced a true pandemic in a century. No one knew what to do or how to run the show.
As a result, many cities, states and countries shut down. Some shutdowns lasted weeks. Others, months. Either way, it wasn’t a positive for McDonald’s stock in the way that it was for some (particularly in tech).
Dine-in customers were not welcome in many locations and many consumers were cooped up at home. In this reality, it’s no surprise that sales suffered. But because McDonald’s is such a dependable food source (regardless of some investors’ opinions on its food quality) and because of its drive-through option, business remained steady.
Consensus expectations call for a 9.4% decline in sales and for a 25% hit to earnings this year. Given the elevated costs and supply chain disruptions, it’s no surprise that earnings took a bigger hit than revenue. But it’s impressive that sales are forecast to fall less than 10% this year given the enormous challenges McDonald’s has had to face.
While we’re at it, it’s worth mentioning the rebound. Consensus expectations for 2021 call for a 14% revenue growth and 39.6% earnings growth. If achieved, both figures will surpass 2019’s result, erasing the pandemic year.
Dividend Dependency
A lot of investors know McDonald’s stock for its dividend — and rightfully so.
Here’s the thing. I like stocks that can pay out a trustworthy dividend. I really like stocks that can raise that dividend. And I love stocks that can do it over decades at a time.
When McDonald’s raised its dividend in October 2020, it marked the 44th consecutive year with an increase. Think about that. Despite the raging inflation in the 1980s, the tech bust in 2000, the Great Recession in 2008 and everything in between, one constant was McDonald’s dividend increases.
Ever since the company started paying a dividend in 1976, it has raised the payout each year. Further, consider the recent increases. Last year, the company raised its dividend by about 8%. That follows increases of 14.9%, 7.4% and 5.6%.
McDonald’s stock also kicks out a 2.2% yield. While it’s not the highest payout in the market by any means, it’s almost three times the current yield of the 10-year Treasury bond. Three times the 10-year yield plus a growing payout each year? Sounds good to me.
Bottom Line on MCD Stock
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When I look at McDonald’s stock, I see a few things. First, I see that, short of a global pandemic, the company can still grow. Meaning that McDonald’s has demand in good times and bad. A lot of companies — from retail to automakers — cannot say this.
Second, I see a company that pays us a decent yield and consistently gives us raises. I love getting a raise.
Third, I see a stock that trades at a reasonable 27 times next year’s earnings. Some will say that’s expensive, but I don’t mind paying 27 times for a company that is forecast to grow earnings 40% next year (albeit off a decline this year) and for a high-quality payout.
The one caveat here is price. While buying and holding is a great way to build wealth, buying on a dip is even better. If McDonald’s stock can continue to push higher, $250 is not out of the question. But let’s see if we can’t buy this name a little lower on a pullback.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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