It was difficult to pick a losing stock last year. The S&P 500 rose 24% and the tech-heavy Nasdaq Composite soared 43%. But there was a caveat to these gains. Though many stocks moved higher by the end of 2023, some stocks' gains were easily eclipsed by monstrous returns seen in tech. Indeed, much of the market's rally last year was driven by explosive growth in top tech companies like Nvidia, Microsoft, Alphabet, Apple, and Tesla.
One stock epitomizing the types of companies that underperformed last year (many were established dividend stocks in boring industries) was McDonald's (MCD 0.83%). The fast-food chain's shares rose 12.5%, with a gain of 15% when including dividends. This significantly lagged the S&P 500's 24% gain.
After underperforming so dramatically, is it time to scoop up shares of this dividend stock? After all, market interest sometimes shifts toward out-of-favor sectors. Perhaps 2024 is the year that strong dividend stocks will shine.
NYSE: MCD
Key Data Points
Firing on all cylinders
Interestingly, the McDonald's growth story seems as intact as ever. In its most recent quarter, revenue rose 14% year over year, or 11% in constant currency. Operating income jumped 16%, or 13% in constant currency. Topping it all off, earnings per share increased 18%, or 15% when excluding the impact of foreign exchange. A nearly 9% year-over-year increase in comparable store sales was key to this momentum.
Looking ahead, analysts expect slower yet still strong growth in earnings per share from McDonald's. The consensus forecast calls for annual earnings per share of nearly 9% over the next five years. Not bad for an old and mature company many people might wrongly assume is no longer growing.
A great dividend stock
One of the great things about McDonald's stock is that it's rewarded shareholders handsomely over the long haul through both share price appreciation and dividends. In fact, the company's tenured dividend history is a testament to the durability and growth engine behind the fast food chain's model. The company has paid dividends to shareholders since 1976, raising its payout every year for 47 years straight.
Today, the dividend yield sits at 2.3%. Yet the company pays out only about 53% of its earnings in dividends. So there's probably more growth to come.
But the McDonald's dividend isn't the whole story regarding how the company rewards shareholders with its excess cash. It also returns cash to shareholders indirectly through share repurchases. Indeed, management estimates that from the end of 2019 through 2023 it returned a total of about $25 billion to shareholders when you combine dividends and repurchases -- a meaningful sum for a company with a market capitalization of about $213 billion today.
So, is McDonald's stock a buy today, after underperforming the market last year? It depends. If you're looking for a stock likely to outperform the market over the long haul, it may not be a good bet. But if you're looking for solid long-term returns, dividend income, and lower volatility than the overall market, it is likely a good investment choice.
Overall, the risk-reward profile of McDonald's stock is attractive. Sure, shares aren't cheap at 26 times earnings. But they aren't expensive either.
