McDonald’s (NYSE: MCD) is one of the most recognisable brands in the world. The golden-arch restaurants can be found in over 100 countries. The company is valued at $195bn today and the stock has crushed the market for decades. But how would I have done if I’d invested £5,000 in McDonald’s shares five years ago?
Tasty winner
The answer is, not bad at all. The stock is up 62% in five years, which beats the 56% gain for the S&P 500. That means my £5,000 investment would be worth around £8,100 today. That’s a compound annual growth rate (CAGR) of 10.1%.
McDonald’s also pays dividends, so I’d need to consider those as well. The company has grown its payout by a five-year CAGR of 8%. If I’d reinvested the dividends I was paid over the last five years, I’d have £9,760. That would have boosted my total return to 81.6%.
Not too shabby at all. But is the stock still a buy today?
Gaining market share
Many experts are predicting the world economy is heading for a recession this year. On the surface, that doesn’t sound great for a consumer discretionary business like McDonald’s. It presents uncertainty and risk for all consumer-facing companies.
However, the firm’s low-priced saver menu offers a budget-friendly way for people to eat out. Indeed, that’s why the fast food giant has recently been gaining market share among low-income consumers. Even as inflation has soared — or specifically because of it — people have been turning to McDonald’s as a low-cost alternative to pricier full-service restaurants.
In its fourth-quarter results released last month, earnings and revenue both topped Wall Street’s estimates. This was the second consecutive quarter that the company noted increasing overall traffic to its restaurants.
From revenue of $5.93bn, the company reported quarterly net income of $1.9bn (or $2.59 per share). That was up from $1.64bn (or $2.18 per share) a year earlier.
CEO Chris Kempczinski has noted that systemwide sales, which include revenues from franchised restaurants as well as those owned by the company, had risen by $20bn since the start of the pandemic. That’s impressive considering it closed 800 restaurants in Russia a little under a year ago.
Will I buy more of the stock?
During the last 2007-09 recession, McDonald’s stock outperformed the S&P 500. That seems to be happening once again as we enter another period of economic uncertainty.
At a time when many businesses are struggling, McDonald’s expects to open 1,900 new restaurants this year. And Kempczinski has said that tougher economic times will probably create attractive opportunities for the firm to take over real estate vacated by weaker competitors.
McDonald’s has upped its dividend payout for 46 consecutive years. This leaves it just four years short of reaching ‘dividend king’ status (50 consecutive years of increasing dividends). I fully expect it to reach this milestone, and then some. The dividend yield today is 2.3%.
The stock carries a forward price-to-earnings (P/E) of 25. While not cheap, that valuation doesn’t seem too extreme to me, considering the company’s wide moat and scale.
If the share price suffered any sort of setback this year, I’d happily add to my holding.
