The first seven weeks of this year have ushered in a return to volatility within the stock market. One way to navigate market volatility is buying S&P 500 stocks that have raised their dividends for at least 25 consecutive years, which are referred to as Dividend Aristocrats.
The fast-food Dividend Aristocrat McDonald's (MCD -0.05%) has held up better than the S&P 500 year to date. McDonald's stock has been down 6.5% while the S&P 500 has dropped 8.4% during that time. Let's dig into four reasons investors should consider the stock for their portfolio.
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1. An impressive pandemic recovery
McDonald's posted robust revenue and earnings growth in 2021. The company generated $23.22 billion in revenue, which represents a 20.9% growth rate over the year-ago period. McDonald's sales were even up 10.2% compared to the pre-pandemic year of 2019.
On the earnings front, non-GAAP (adjusted) diluted earnings per share (EPS) surged 53.4% higher year over year to $9.28 last year. This was the result of the company's higher revenue base and a 790-basis point increase in its net margin to 32.5%. Even against the pre-pandemic year of 2019, McDonald's adjusted diluted EPS was up 18.4%.
What led to these tremendous results? McDonald's systemwide sales (which includes both 7% company-owned and 93% franchisee-owned McDonald's locations) reached a record-high $112 billion last year. Despite COVID-19 pandemic disruptions continuing to an extent in 2021, McDonald's opened over 650 new restaurants during the year, according to CEO Chris Kempczinski's remarks during the company's recent earnings call.
That brought the company's global restaurant count to an astonishing 40,000-plus heading into this year. So more stores contributed to the rise in McDonald's systemwide sales.
2. A popular loyalty program
McDonald's and its franchisees also became even more efficient in running existing stores. The company's global comparable sales rose 17% over last year and 8% over 2019. McDonald's loyalty program, known as MyMcDonald's, was a major driver. Since the program launched in the U.S. last July, the MyMcDonald's program has grown to 30 million enrolled members and 21 million active members earning rewards.
The overwhelming success of MyMcDonald's is important because it led to an increase in customer engagement and repeat business. This was evidenced by a 10% increase in digital customer frequency since the U.S. launch. With rollouts scheduled for the first half of this year in the United Kingdom and Australia, McDonald's customer engagement and sales should keep growing.
3. The dividend is secure
McDonald's also appears poised to extend its 46-year streak of dividend growth in the years to come. McDonald's has both the profitability and the free cash flow (FCF) to maintain its reputation as a top-notch dividend grower.
This is supported by McDonald's adjusted diluted EPS payout ratio of 56.6% last year. Since independent business owners pay the capital necessary to open a McDonald's location and become a franchisee, McDonald's franchise business model isn't too capital-intensive. The company should have plenty of capital to keep growing the business.
McDonald's FCF payout ratio was even lower at 55.6% last year, allowing for plenty of capital to open new company-owned restaurants, pay down debt, and grow the dividend.
In light of McDonald's growth forecast, I believe the stock should be able to grow its dividend at a high-single-digit clip in the medium term. Paired with a market-beating 2.2% dividend yield, this offers dividend growth investors a nice combo of yield and growth prospects.
4. Valuation isn't stretched
The final reason to consider buying McDonald's stock is that the valuation is reasonable for its quality compared to the restaurant industry. McDonald's forward price-to-earnings ratio of 22.8 is slightly below the restaurant industry average of 23.8.
What's more, McDonald's respectable earnings growth looks positioned to continue. Analysts anticipate that McDonald's non-GAAP diluted EPS will grow at a rate of 13% annually in the next five years. Given that this rate is about the same as the industry average of 14.7%, the stock's valuation seems fair.
I believe that strong growth will continue for McDonald's in the years ahead.
