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You Should Buy McDonald's Before It's Too Late

Posted on Wednesday, January 29th, 2020 by Thomas Hughes

No Love For McDonald’s Results

McDonald’s (MCD) reported what would have otherwise been a stellar earnings report this morning. The company delivered better than expected top and bottom-line performance driven by a record increase in comp-store sales. What the market chose to focus on, however, was an unexpected increase in CAPEX that threatens to cut into profits.

Before I move on, let's talk about comparable store sales first. The Golden Arches saw global comps rise nearly 6.0% to a +10-year high. The U.S. comps were equally strong, up 5.0% and both better than the analyst’s consensus estimates. The reason for the increase is simple. McDonald’s has been executing on a worldwide turnaround strategy for many years and the strategy is paying off. Couple this with a “bubbly” consumer and the times are good for McDonald's. Now let’s talk about that CAPEX again.

Spend A Little Now, Make A Lot Later On …

McDonald’s 8-K filing shows it intends to increase its CAPEX by 5% to 7% in 2020. The spending is partially due to costs related to the worldwide owner/operator convention but the lion’s share will go towards new technology.

McDonald’s is a leader when it comes to automating its stores so we can expect to see those efforts widen. Considering the Velocity Growth Plan is already delivering strong returns to shareholders I would expect these new efforts to do the same.

Along with this, McDonald’s is expecting to open at least 1,400 new stores in 2020. The company will invest $800 million in 400 corporate-run facilities while licensees and affiliates will contribute the rest. In total, McDonald’s expects to open a net of 1,000 new locations this year.

The Results Don’t Lie

Now we can look at the 4th quarter results in a new light. Yes, McDonald’s is going to spend some of its hard-earned cash this year but that spending has been paying off. Revenue in the 4th quarter came in at $5.35 billion, that’s up 3.7% from last year and shows a return to growth after several years of declines. Adjusted EPS was only in-line with the previous year but GAAP EPS grew by 15% and beat by 5%.

Looking forward, the consensus estimate of $8.50 or +8% in 2020 may be a little high. With CAPEX spending expanding to $2.4 billion there is a chance earnings to shareholders will be affected. Even so, consolidated operating income and earnings attributable to shareholders is on the rise and the dividend is safe.

McDonald’s Pays A Tasty Dividend

McDonald’s doesn’t pay the highest yielding distribution in the market but it is among the most committed dividend-paying stocks you can buy. The company’s policy is to pay as much free-cash-flow to shareholders it can while maintaining a proper growth trajectory. The payout ratio is running near 64% which is easily managed and the distribution growth rate is attractive at 7.6%. At current prices, the stock is yielding about 2.4% but that won’t last. Shares are already on the move.

"Our Velocity Growth Plan helped produce strong operating performance over the past several years, and our underlying financial strength continues to build long-term value for our shareholders. As we begin 2020, we remain committed to our capital allocation philosophy to reinvest in the business to drive profitable growth and return all free cash flow to shareholders through a combination of dividends and share repurchases," said Kevin Ozan, McDonald's Chief Financial Officer.

The Technical Outlook, The Uptrend Will Continue

Shares of McDonald’s jumped on the initial report, fell on word CAPEX was rising, and then regained their bullish footing by the open. The prospect of future growth and growing dividend payments are too irresistible for dividend-growth investors.

The early action is bullish and breaking resistance to a four-month high so more new highs are expected. The indicators confirm today’s breakout with bullish crossovers but the signals are still weak. Once price action closes above $214 a move to $220 is expected. A move above $220 would set a new all-time high and confirm the continuation of the longer-term uptrend.

You Should Buy McDonalds Before Its Too Late

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