Patient investors are always hunting for deals on high-performing stocks. These discounts usually occur when Wall Street is focused on a business' short-term challenges to the exclusion of its much brighter long-term outlook.
You might recognize that value-seeking approach as the basis for the Dogs of the Dow investment strategy that concentrates on underperforming dividend stocks in the Dow Jones Industrial Average. The 1% uptick that investors have seen with McDonald's (MCD -0.91%) stock this year hasn't pushed McDonald's dividend high enough to make it one of these "dogs." But those returns do put the stock below the Dow's gains through mid-November.
This discount is one of several good reasons to consider buying McDonald's stock now with an eye toward holding it for many years to come.
The big worry
The main concern on Wall Street is the chain's slowing demand. McDonald's reported solid global growth in late October, with comparable-store sales up 9% in the third quarter, which ran through late September.
Yet Mickey D's saw declining customer traffic in the key U.S. market, putting all the pressure on rising spending to boost overall comps by 8%. In contrast, Chipotle Mexican Grill is getting growth from higher spending and from increased customer traffic. This balance suggests it will be easier for Chipotle to maintain or accelerate sales gains.
Investors should keep an eye on McDonald's traffic over the next few quarters, but there's no reason to be overly worried about the growth slowdown. Customer spending is slowing across the fast-food industry, and that has translated into weaker demand at the value end of the spectrum.
Executives expected the shift, which isn't threatening the chain's wider 2023 goals. "The macroeconomic environment is unfolding in line with our expectations for the year," CEO Chris Kempczinski said in a press release.
Reasons to buy
There's no need to wait until a growth rebound before buying McDonald's stock. Owning it today ensures you have a highly profitable restaurant chain in your portfolio, after all.
Operating profit margin recently set a record at over 45% of sales. Chipotle can't approach that industry-leading result, mainly thanks to McDonald's franchised approach that delivers a steady stream of franchise, royalty, and rental fees.
MCD Operating Margin (TTM) data by YCharts. TTM = trailing 12 months.
McDonald's generates ample cash flow as well thanks to that franchised sales model, which means more direct cash returns through stock buybacks and dividend payments. The chain's 2023 dividend hike was 10%, and next year's increase might be similarly strong, given the robust earnings growth in recent quarters.
Outlook and price
The best news for dividend investors is that McDonald's stock is on sale right now. You can own shares for 24 times earnings, down from around 30 times earnings at the start of the year. The dividend yield has crept up as the stock price has declined, and is now sitting at a generous 2.3%.
It's always possible that shares will continue to trail the market into 2024, especially if the fast-food industry continues slowing or if a wider recession develops in the U.S.
But McDonald's has thrived through dozens of cyclical downturns in the past and is highly likely to emerge from the next one with its industry leadership intact.
That's why investors can see the latest stock price slump as an opportunity to capitalize on short-term worries and pick up McDonald's at a tantalizing discount.
