It offers a higher yield than the broader market and is currently on sale.
Due to the market rally, valuations of dividend stocks in 2024 have increased while yields have decreased. These trends have made it difficult for income investors to find attractive value. The S&P 500 index, which is full of blue-chip dividend payers, was up 21% through late September, but yielded just 1.3%.
Dividend investors can do more than that.
There is one stock in the index that is priced at roughly the same level as when 2024 began. The company’s stock currently has a yield of 2.3%. Indeed, business is going through a tough time right now as shoppers become more cautious about spending on fast food. However, patient investors could still do well to hold McDonald’s (MCD 0.10%) stock for the long term. Here’s why:
soggy fries
McDonald’s has given investors heartburn with its past several earnings reports that show stress on the fast-food giant. Management revealed in late July that foot traffic declined in the second quarter, which led to a rare decline in same-store sales (comps).
That’s not surprising at all. Foot traffic has been weak for several quarters, but this has been offset by the chain’s price increases in 2023. But the rise in price inflation appears to be over, leaving Wall Street concerned about what will trigger the next growth cycle.
Management added to these concerns by describing a difficult sales environment. “Consumers are becoming more discerning about their spending,” CEO Chris Kempczinski said in a press release in late July.
Investors still appear to be overreacting to a 2024 economic slowdown. Keep in mind that McDonald’s posted rapid growth a year ago, with profits increasing 12% in the second quarter. In this context, the recent 1% decline isn’t all that alarming. The company generates significant revenue from franchise fees, rents and royalties, which helps explain how consolidated sales are setting records even as guest numbers have declined.
finances
And you’d be hard-pressed to find many companies as financially strong as McDonald’s. Burgerslinger generated operating cash flow of $4.1 billion in the first six months of 2024, representing 32% of sales. Profit margins for the same period reached an impressive 45% of sales, down slightly from the record high of 45.5% in mid-2023.
As you might expect, Mickey D’s dividend is well covered by these generous earnings, and investors can expect the dividend to grow, just as they have in each of the past 48 years. The chain is now close enough to join the exclusive club of Dividend Kings (companies that have raised their dividends every year for more than 50 consecutive years).
In the meantime, the stock could suffer from lower returns, at least until sales growth trends pick up again. McDonald’s has a lot of levers it can leverage in this regard, such as increasing its value-added products and launching more limited-time offers. The company has an advantage in the drive-thru segment, which is growing in popularity among fast-food fans, and delivery platforms could also boost sales.
Investors can take advantage of this pessimism about the business to pick up McDonald’s stock at an attractive price. The company’s stock has a P/E ratio of 26 times, which is about half of Chipotle’s valuation. Admittedly, McDonald’s doesn’t have the momentum that today’s Tex-Mex chains have. However, there is a good chance of a return to a more normal pace of growth over the next few quarters.
In the meantime, investors can receive solid dividends backed by some of the strongest profits in the fast food industry. That’s the secret to getting good long-term returns from this.
Demitri Kalogeropoulos works at Chipotle Mexican Grill and McDonald’s. The Motley Fool has a position on Chipotle Mexican Grill and recommends Chipotle Mexican Grill. The Motley Fool recommends the following options: September 2024 Short $52 on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
