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McDonald’s Is on the Right Side of Inflation

Stock MarketsSep 29, 2021 01:31PM ET
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© Reuters. McDonald’s Is on the Right Side of Inflation

McDonald's (MCD) is the world's largest and oldest fast-food franchise. It operates close to 40,000 stores in the U.S., and around the world.

The company recently joined several publicly listed companies taking steps to protect investors from rising inflation.

First, it raised its dividend by 7%, to 1.38 per share. That's well above the inflation rate, which runs around 5% at the annual level.

Second, it resumed its share repurchase program. That could offer further protection to investors from inflation, as stock repurchases are usually bullish for a company's shares. I am bullish on the stock. (See MCD stock charts on TipRanks)

A Bullish Strategy

Dividend hikes make shares more appealing to conservative investors, who want to collect income while holding on to a company's shares.

Stock repurchases reduce the number of shares trading in the market, raising the ownership stake of existing stockholders.

In addition, stock repurchases may signal that the company's shares are undervalued, and a "vote of confidence" in the company's future.

An Enduring Franchise

McDonald's is a franchise that has endured the challenges of time through "collective entrepreneurship," which allows its franchisee-members, management, and shareholders to share the risks and rewards from discovering and exploiting new business opportunities.

That's a business model that has become the standard for other franchise organizations.

MCD's adaptation and innovation allowed the company to address the needs of a diverse consumer market, from the baby-boomer market in the 1960s, to the global market of the 1970s and the 1990s, to the requirements of the millennial market in recent years.

Wall Street's Take

Wall Street has noticed McDonald's enduring advantage, making its shares a big winner over the five decades it has been a public company.

According to research firm S&P Capital IQ, McDonald's shares have returned almost 17%, on average, annually, compared to the S&P's average return of about 11% per year. However, its shares have underperformed the broader market YTD.

That situation may change soon, as the dividend hikes and stock repurchases will draw Wall Street's attention to the company's growing free cash flow — the difference between operating cash flow and capital expenditures. According to Macrotrends, McDonald's free cash flow grew 13.5% in 2017, 34.1% in 2018, and 20.9% in 2019.

TipRanks gives McDonald's a Smart Score of 9 out of 10, citing solid technicals, and increased hedge fund activity.

McDonald's has a broad analyst following. They are rating its shares a Strong Buy, based on 21 Buys, and three Holds assigned in the past three months.

The average MCD price target of $267.87 implies upside potential of 9.8%.

Bottom Line 

McDonald's is an enduring franchise with strong free cash flow to finance dividend hikes and share repurchases, to protect investors from inflation and deliver superior market returns.

Disclosure: At the time of publication, Panos Mourdoukoutas owned shares of McDonald’s (NYSE:MCD).

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates, and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices or performance.

McDonald’s Is on the Right Side of Inflation

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