McDonald's Earnings Preview: Growth Plus a Rising Yield

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The largest fast food company in the world, McDonald’s (NYSE: MCD) is a favorite amongst investors for several reasons. For its solid, ever-increasing dividend yield (currently around 3.4%) to its outstanding growth efforts abroad, McDonald’s has been a solid investment for years. With the company set to report earnings next Wednesday, the market will be paying attention, however McDonald’s investors are confident, and for good reason.

 

 

McDonald's is one of the most recognizable brand names in the world, with almost 34,000 restaurants worldwide. Total sales at all restaurants were $86 billion last year and are expected to climb higher this year. Just a side note: To really appreciate how far McDonald’s has come, try to remember the signs outside the restaurants years ago that read “___ million served,” which eventually became “___ billion served” and finally “billions and billions served.”  The furthest back I can remember was “130 million served.”  Now the company does almost $100 billion in sales each year­. That, my friends, is growth! 

McDonald’s has grown to the point where it is several times larger than its nearest competitors.  The two fast food names that generally come up in the same conversation as McDonald's are Burger King (NYSE: BKW) and Wendy’s (NASDAQ: WEN) which have market capitalizations of just $6.2 billion and $1.9 billion respectively. For the sake of comparative valuation later on, I’m going to include Yum! Brands (NYSE: YUM), the parent company of KFC, Pizza Hut, and Taco Bell, which is still much smaller, but with a $30.2 billion market cap it is much closer to McDonald's in terms of size. 

McDonald’s operates under its “Plan to Win” strategy that it began in 2003.  Part of this strategy was to end its relationship with several partner brands in order to focus on their core business.  McDonald's subsequently disposed of its significant stake in Chipotle Mexican Grill, a move which it may be regretting, and Boston Market, which they probably don’t regret quite as much. McDonald’s prioritiy has become to increase efficiency and profitability in the company’s existing restaurants, and to more narrowly focus growth into new and underutilized markets. I don’t foresee this strategy changing significantly, as it seems to be working for them so far. 

As for the dividend I mentioned before, McDonalds’ history of dividend increases is among the best in the market. Just over the past decade, the company has increased the dividend from $0.24 in 2002 to $3.08 today, an average annual increase of 29%! I would be extremely surprised if we did not see a further increase for 2013, and somewhere in the neighborhood of $3.40 would be my best estimate.  There is also a healthy buyback program in place, and the number of outstanding shares has been reduced from 1.146 billion in 2008 to 1.004 billion currently, a reduction of 12.4%.

 

 

 

Now, let’s take a look at McDonald’s in terms of valuation.  The company currently trades at 17.3 time 2012’s consensus earnings of $5.31, which are projected to grow to $5.77 and $6.38 in 2013 and 2014 respectively, or annual growth rates of 8.7% and 10.6%. In contrast, Yum Brands trades at 20 times earnings, with very similar growth projections.  

To sum it up, McDonald’s is by far the largest, most stable fast food company with an excellent profitability strategy.  I anticipate nothing but a great earnings report, however more important than the numbers themselves is what the company has to say about its growth expectations and the profit margins of its existing stores.  With the economic concerns in Europe and the rumors of slowing growth in China, any positive news here could be a catalyst for the next leg up in McDonald’s.

 


KWMatt82 has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide, Chipotle Mexican Grill, and McDonald's. The Motley Fool owns shares of Chipotle Mexican Grill and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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