McDonald’s Corporation (MCD) needs no introduction. It’s quite safe to say that most people have (hopefully) enjoyed a meal in one of the company’s restaurants at some point in their lifetimes. The company operates in 119 countries, with around 37,200 of its 40,039 restaurants being franchised, representing around 93% of McDonald’s total restaurants.
This is the charm of McDonald’s business model. The company generates most of its cash flows off of the real estate rents and royalties its franchisees pay without being involved in the overall hassle needed to actually run its locations.
In my opinion, McDonald’s shares make for a trustworthy investment that is likely to keep delivering positive shareholder returns for decades to come. That said, despite the recent correction shares have experienced, McDonald’s valuation remains elevated and higher from its historical average levels, which could be rather troubling. I remain neutral on the stock.
Recent Results
McDonald’s Q4 2021 results came in rather strong, with the company recording revenues of $6.01 billion, 13.1% higher year-over-year. Revenue growth was powered by robust performance in both company-operated restaurants and franchised restaurants.
Specifically, global comparable sales grew 12.3%, mirroring positive comparable sales across all segments. U.S. comparable sales greatly contributed to this, as they increased 13.8% for the full year, celebrating the highest U.S. annual comparable sales growth since 1993 and the 7th consecutive year of upbeat comparable sales.
Net income came in at $1.64 billion or $2.18 per share vs. $1.38 billion or $1.84 per share in the comparable period last year, driven by elevated margins from the company’s franchised restaurants. Adjusted EPS was $2.23 compared to $1.70 previously as well.
Full-year adjusted EPS landed at $9.28. As a result, and considering McDonald’s momentum entering in 2022, I would expect EPS close to $10.00 for this year.
Dividends and Valuation
McDonald’s boasts the title of Dividend Aristocrat, with its dividends having been increased annually for the past 46 years without any interruptions. In September, McDonald’s grew its dividend once again, as it has done continuously since 1976. The dividend hike was by 7%, implying an acceleration from McDonald’s previous dividend hike of just 3%, which was the weakest increase since 2002.
Based on a potential Fiscal Year 2022 adjusted EPS of $10.00, the company’s forward P/E stands at around 25. Note that this is a quite higher multiple from its past decade-long range of around 18-22. Consequently, the possibility for valuation compression going forward is not improbable. This is also exhibited in the stock’s dividend yield, which now stands at 2.2%, also below its historical average levels. Hence, current investors are likely to be subject to weaker total returns ahead.
Wall Street’s Take
Turning to Wall Street, McDonald’s has a Strong Buy consensus rating, based on 22 Buys and two Holds assigned in the past three months. At $288.14, the average McDonald’s price target implies 14.8% upside potential, nonetheless.
Conclusion
In my view, McDonald’s makes for reliable investment, particularly fitting dividend-growth investors’ appetites. The company’s latest results revealed robust growth and comparable sales improvements. However, I feel like the stock’s lofty valuation couldn’t result in anything other than average total returns ahead. Consequently, I am neutral on the stock.
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