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
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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.

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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.

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