3 Reasons McDonald's Stock Could Rise

McDonald's stock could benefit from three things that could go right.

Aug 18, 2014 at 6:13PM

These are challenging times for McDonald's (NYSE:MCD). The world's largest burger chain is posting negative comps, likely positioning it to deliver its first full year of declining same-restaurant sales since 2002. However, let's not assume that the Golden Arches will be forever tarnished. Let's go over a few things that could go right for McDonald's stock in the coming quarters.

1. Comps can bounce back

It's easy to be down on McDonald's. It's coming off three consecutive quarters of slightly negative comparable-restaurant sales growth in the U.S., and now things are starting to get iffy overseas. The current quarter got off to a horrendous start, with McDonald's suffering a 3.2% slide in domestic comps with an even bigger slide in Asia. It's not pricing, as McDonald's pricing had increased an average of 3% over the past year through June. New premium items and the Dollar Menu adding items last year at the $2 and $5 price points find folks willing to pay more.

The shortfall here is coming from traffic, with fewer patrons lining up at the drive-thru window or queuing up at a register. However, feasting on this trend ignores the fact that the company delivered consistent comps growth for roughly a decade before coming undone. 

Whether we're talking about an economic lull sending consumers back to Mickey D's for its fast-food bargains or a bar-raising menu move that brings back diners, don't underestimate the marketing muscle of the world's largest burger chain.  

2. McDonald's can reshape its public image

It may not be fair, but McDonald's has become ground zero in the fight to push minimum wages higher. McDonald's isn't necessarily paying less than its burger-flipping peers, but it's where protestors gather as they clamor for better entry-level wages. The movement could be hurting its popularity, especially since many of its smaller rivals are holding up relatively better. 

McDonald's could shock the world, going from pariah to hero by boosting its payroll, but that wouldn't be as easy as it may seem. McDonald's relies on franchisees working on much leaner margins than McDonald's itself, and meatier paychecks would have to be passed along to consumers through unpopular menu price hikes. 

However, the good thing about being as big as McDonald's is that you can invest in high-tech automation that allows for higher starting wages with smaller staffs. McDonald's already has automated soda fountains with a carousel of cups that fill as ordered, and smoothie machines that make the icy beverages with a simple push of a button. 

Anything that McDonald's can do to refashion itself as the good guy in a way that makes it harder for smaller rivals to keep up would be a smart business move. 

3. McDonald's could dramatically boost its dividend

One of the reasons that shares of McDonald's have been resilient -- hitting a new all-time high in May -- is that it pays out a generous quarterly dividend. McDonald's currently yields a robust 3.45%, and the news gets better: The chain has increased its payouts for 37 years in a row.

There is room for the disbursements to grow. As generous as the yield may be we're still talking about a company that declared just $3.12 a share in dividends in 2013 against $5.55 in earnings. That's a payout ratio of 56%, giving the company more leeway to keep the streak going.  

McDonald's is also committed to returning more of its money to its stakeholders. Back in May it announced that it would be returning $18 billion to $20 billion to its investors over the next three years through dividends and share buybacks.   It's good for the money. It earned more than $16.5 billion over the past three years combined -- spending more than $16 billion over the last three years on dividends and buybacks -- and analysts see profitability growing in the coming years. Investors will win either way. If McDonald's buys back stock it will inflate profitability on a per-share basis. If it decides to jack up its payouts, it will justify a higher stock price because of its more attractive yield. McDonald's wins either way, even if it's been losing lately with investors.

Stay hungry for the top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend-paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers