The iconic global restaurant chain McDonald's (MCD -0.05%) is bouncing back strong after the pandemic hurt sales in 2020. The Golden Arches is thriving as consumers look for convenience and affordability, two things it offers in abundance at its roughly 40,000 locations worldwide.
It's understandable for investor interest to rise as a company's operating performance improves. Let's look closer at McDonald's prospects, dividend, and valuation, and determine if investors should add the stock to their portfolios.
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Digital options fuel sales growth
Interestingly, McDonald's revenue in 2021 eclipsed the level from 2019. That's an essential milestone as the top line fell 10% in 2020 when the company was forced to close many of its locations to in-person diners. More precisely, revenue totaled $23.2 billion in 2021, up from $21.3 billion in 2019. Fueling that growth has been the rise of more convenient ordering and fulfillment options.
Data by YCharts.
Digital systemwide sales surpassed $18 billion in 2021 and comprised over 25% of total sales in the company's top six markets. Folks can now use the McDonald's app to order and choose their desired fulfillment method (pick up, drive-thru, or delivery). The feature adds another layer of convenience, one of the main reasons people choose McDonald's, and the $18 billion in digital sales proves just how much it is appreciated. The delivery option, in particular, could be a boom for several years. It expands the geographical reach of each McDonald's restaurant and serves consumers unwilling or unable to walk or drive to the nearest location.
The increase in digital sales is also helpful to McDonald's bottom line. The company only operates 7% of its restaurants with the remainder run by franchisees. Therefore, an incremental rise in sales flows nicely to the bottom line. It's also beneficial for franchisees because one of the main challenges of late has been retaining enough staff to meet demand. Digital orders can mean fewer cashiers or drive-thru operators, reducing labor costs for restaurant operators.
Data by YCharts.
That partly explains how McDonald's reported record earnings per share in 2021. Earnings are a critical element of the company's ability to pay dividends. Without sufficient profits, dividends cannot be sustained long term.
McDonald's profitability means it can continue paying and expanding its payout as it has over the years. Since 2012, the Dividend Aristocrat has increased its annual payout from $2.87 to $5.25, extending its nearly five-decade streak of dividend growth.
McDonald's is trading at a fair valuation
Data by YCharts.
At a price-to-earnings ratio of 25 and a price-to-free cash flow ratio of about 27, McDonald's is trading near its five-year average for these metrics. Considering McDonald's excellent long-term prospects, investors can feel good about adding McDonald's stock to their portfolios.
