With a global recession potentially around the corner, now is a wise time for investors to recession-proof their portfolios. This can best be done by purchasing companies with high-demand products and/or services that are provided at affordable price points.
The fast-food restaurant chain McDonald's (MCD -0.42%) is a safe pick for dividend growth investors. Let's take a look at the company's fundamentals to understand why it could soon become a Dividend King.
McDonald's has a winning business model
McDonald's is as recession-proof a business as is practically possible for the following two reasons: The company's brand recognition is incredibly high, and its dollar menu makes its products affordable no matter what is going on with the economy.
The fast-food franchise recorded $5.9 billion in revenue for the third quarter ended Sept. 30. This was down 5.3% year over year. At first glance, a decline in revenue is not what current or prospective shareholders want to see.
But this was only because of two variables. First, McDonald's permanently closed restaurants in Russia and temporarily closed some restaurants in Ukraine due to the ongoing war between the two countries. Second, the U.S. dollar remained strong during the quarter. Since McDonald's is a global business that converts its international sales into U.S. dollars, this was a headwind to the tune of 7% in the quarter.
Adjusting for these elements, global comparable sales increased 9.5% over the year-ago period. Nearly $7 billion -- or more than a third of the company's systemwide sales (which includes both franchisee-owned and company-owned stores) were generated through its digital channels. This indicates that McDonald's commitment to building out its digital sales infrastructure in recent years paid dividends for the quarter.
The company generated $2.68 in non-GAAP (adjusted) diluted earnings per share (EPS) during the third quarter, which was 2.9% lower year over year. But factoring out the aforementioned foreign currency translation headwinds, McDonald's adjusted diluted EPS edged 4% higher over the year-ago period.
With recent changes in its board of directors, the future of the company looks bright. McDonald's Sheila Penrose retired from the board of directors and was replaced by three people with tons of relevant executive experience. Amy Weaver, chief financial officer of Salesforce (NYSE: CRM), is arguably the biggest pickup for the company. Weaver's tech background should be a positive factor in McDonald's quest to bolster its digital sales apparatus. This is why analysts are anticipating the company will deliver 6.7% annual adjusted diluted EPS growth through the next five years.
Image source: Getty Images.
Robust dividend growth should continue
If McDonald's can hand out four more dividend hikes to shareholders, the company will become a Dividend King in 2026. And based on its well-covered dividend, the fast-food giant should have no difficulty transforming this hypothetical into reality.
This is backed up by the fact that McDonald's dividend payout ratio will clock in under 57% in 2022. Given that this provides the company with the capital necessary to invest in future growth opportunities and repay debt, dividend growth should at least be in line with earnings growth or just ahead of it.
Pairing this 7% annual dividend growth potential with a 2.2% starting dividend yield makes McDonald's an intriguing pick for dividend growth investors. This is especially the case considering that the S&P 500 index yields merely 1.7%.
The valuation is fair
McDonald's is one of the few brands that is recognized in almost every corner of the world. Yet, the valuation doesn't appear to be stretched for new money to enter into the name either.
McDonald's forward price-to-earnings (P/E) ratio of 27.4 is slightly higher than the S&P 500 index's restaurant industry average forward P/E ratio of 26.1. While not a bargain-bin valuation, that's also hardly an unreasonable premium to pay for a dividend growth stock of McDonald's caliber. That's what ultimately makes the stock a buy for dividend growth investors.
