Even with the stock market rally in recent weeks, the S&P 500 index has still dipped 13% so far this year. Yet the index offers investors a mere 1.5% dividend yield. Most investors will have a difficult time generating a significant amount of dividend income with such a low yield.
The good news is that there are plenty of individual stocks that can provide much higher starting passive income for investors -- with room for future growth to boot. The fast-food franchise and Dividend Aristocrat McDonald's (MCD 1.32%) offers a market-beating 2.1% dividend yield.
But is the stock a buy for yield-oriented investors? Let's dive into McDonald's fundamentals and valuation to address this question.
A quarter of good profit growth
In late July, the iconic restaurant chain shared its financial results for the second quarter (ended June 30). McDonald's narrowly missed the average analyst revenue estimate but came in ahead of the non-GAAP (adjusted) diluted earnings per share (EPS) prediction during the quarter.
The company reported $5.7 billion in revenue in the second quarter, which equates to a 2.9% year-over-year decline. This was just short of the $5.8 billion analyst consensus for revenue. What was behind just the third revenue miss out of the last 10 quarters?
McDonald's global comparable sales were up 9.7% over the year-ago period for the quarter. This was driven by the following across-the-board comparable sales growth: 3.7% in the U.S. segment, 13% in international operated markets, and 16% in international developmental markets.
The company's overall revenue shrank during the quarter for two reasons. First, McDonald's divested its operations in Russia and temporarily discontinued operations in Ukraine due to the ongoing military conflict. Second, unfavorable foreign currency translation was a 6% headwind to revenue. Factoring out the latter headwind, the company's revenue grew 3% year over year in the second quarter.
McDonald's recorded $2.55 in adjusted diluted EPS during the quarter, which was a 7.6% growth rate over the year-ago period. This managed to exceed the adjusted diluted EPS analyst estimate of $2.47 for the quarter. And it was the sixth adjusted diluted EPS beat out of the last 10 quarters.
The company's non-GAAP net margin expanded 280 basis points year over year to 33.1% in the second quarter. Along with a 1.3% reduction in the outstanding share count to 742 million from share repurchases, this explains McDonald's robust adjusted diluted EPS growth for the quarter.
The business is adapting and thriving
The company's decent results in the second quarter have been the result of its ability to evolve. McDonald's digital sales eclipsed $6 billion in its top six markets during the second quarter, which made up approximately one-third of its total systemwide sales. And the company is looking to build on this tremendous momentum.
The company also moved recently to shake up its board. Longtime board member Sheila Penrose is retiring and being replaced by three individuals: Tony Capuano, CEO of Marriott International; Jennifer Taubert, executive vice president of pharmaceuticals at Johnson & Johnson; and Amy Weaver, chief financial officer of Salesforce.
Weaver's background should be especially helpful to McDonald's and its mission to boost its digital sales and compensate for rising food inflation.
Image source: Getty Images.
Solid dividend growth can persist
Believe it or not, a McDonald's track record of 46 consecutive years of dividend growth looks like just the beginning for the consumer staple.
That's because analysts believe McDonald's will deliver 7.2% annual adjusted diluted EPS growth through the next five years. Combined with a dividend payout ratio that will be around 57% in 2022, this should give the company the ability to hand out dividend raises in line with earnings growth. That's why I believe high-single-digit annual dividend growth will continue going forward.
A reasonable valuation
McDonald's is one of the best-known brands in the world. Right now, its stock's forward price-to-earnings (P/E) ratio of 26.4 is just below the restaurant industry average of 26.6. This is an attractive valuation for a stock that is just four dividend increases -- and soon to be three -- away from becoming a Dividend King, which makes McDonald's stock a buy.
