With the overall market tumbling again today, it appears investors aren’t lovin’ McDonald’s (NYSE:MCD) third-quarter results. But after reporting a same-store sales increase of 7.1% in what can only be called a challenging global marketplace, there is a lot to like about the golden-arched giant.
It shouldn’t be a huge surprise that McDonald’s North American comparable-store sales increased by 4.7%, while Darden Restaurants (NYSE:DRI) and other casual dining restaurants serve up disappointing sales and earnings declines. McDonald’s and fast-food peers including Yum! Brands (NYSE:YUM), Burger King (NYSE:BKC), and Wendy’s/Arby's Group (NYSE:WEN) have drummed up sales by lowering prices to counter declining consumer confidence levels.
McDonald’s earnings per share from continuing operations increased by 27% for the quarter, helped out by currency translation gains and the company’s $1 billion worth of stock repurchases. And speaking of returning capital to shareholders, the company increased its cash dividend by 33%, which now delivers an annual yield of 3.6%.
McDonald’s has done a reasonable job of keeping costs in check with inflation and commodity price increases, delivering operating and SG&A (selling, general, and administrative) cost increases of a meager 3% and 2%, respectively.
So why aren’t investors sweeping in to pick up McDonald’s at a trailing price-to-earnings ratio of less than 14?
Probably for the same reason that the Dow is hovering around a 3% loss today: People are afraid of what’s coming. But, for long-term investors, this looks like an opportune time to get into a blue-chip stock with stellar performance, even during a widespread financial crisis.
There is no reason to think that Joe Six-Pack will stop buying $0.99 Double Cheeseburgers, even if we are in a recession, and perhaps there are reasons to think this inexpensive meal item will gain popularity. And even if you’re afraid of short-term prospects, the 3.6% dividend sweetens the pot through the tough times. At this price, McDonald’s is a great defensive play in this skittish market.
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