Shares of fast-food giant McDonald's (MCD -0.34%) have taken a big hit this year. Year to date, the stock is down about 17%.
Most of this pullback has occurred in just the last 30 days as the stock hasn't been spared from the overall market's bearish move lower. The S&P 500 is down 10% year to date, highlighting the challenging market environment.
But has McDonald's stock decline gone too far? After all, the last time the stock had a price-to-earnings ratio this low was during the 2020 market crash, when lockdowns were at their worst.
Let's take a closer look at the fast-food company to see if its shares look attractive today.
McDonald's stock valuation
Several metrics easily highlight the stock's compelling valuation today. Its price-to-earnings ratio of 22, for instance, is down from levels above 30 in late 2020 and early 2021. Further, its typical range was between about 24 and 30 during pre-pandemic years 2017 to 2019. McDonald's also notably trades at a fairly low price-to-free-cash-flow ratio of 23.
While the stock's valuation multiples could come down even more before shares begin gaining some meaningful recovery momentum, investors who buy shares today will notably get paid a hefty payout to own the stock. McDonald's dividend yield currently sits at 2.5%. Even more, this dividend is growing.
For 45 consecutive years, the company has increased its dividend. Its most recent dividend increase occurred late last year when McDonald's boosted the payout by 7%. With only $3.9 billion of the company's $7.1 billion in trailing-12-month free cash flow going to dividends, there's likely another dividend increase in the cards for investors this year.
Image source: Getty Images.
Strong business momentum
With McDonald's stock falling so sharply, you'd think the company is facing some serious problems. But that's far from the case. The company's fourth-quarter revenue increased 13% year over year, helped by a 12.3% increase in global comparable sales. Even in the more mature U.S. market, comparable U.S. sales rose 7.5% year over year or 13.4% over a two-year period.
McDonald's digital momentum, in particular, has been particularly encouraging. Digital systemwide sales increased 25% year over year to $18 billion in 2021.
"Our investments in technology and digital are paying off as our digital engine continues to make the customer experience more seamless and fuels growth in the process," explained McDonald's CEO Chris Kempczinski in the company's fourth-quarter earnings call. "Our top six markets saw more than one-fourth of their systemwide sales or $18 billion come from digital channels in 2021, a 60% increase over 2020."
Adding to the bull case, analysts are upbeat about the fast-food giant's future. On average, analysts expect McDonald's earnings per share to grow at a compound rate of about 13% over the next five years.
All of this means that McDonald's shares are beginning to look attractive. Sure, they aren't a bargain at this level. But an investment in the stock at today's price could yield meaningful returns over the long haul.
