Updated on January 27th, 2022 by Felix Martinez
Every year, we review each of the 66 Dividend Aristocrats, the group of companies in the S&P 500 Index, with 25+ consecutive years of dividend increases. We believe the Dividend Aristocrats are among the best stocks to buy and hold for the long run.
Broadly speaking, to make it on the list of Dividend Aristocrats, a company must possess a profitable business model with a valuable brand, global competitive advantages, and the ability to withstand recessions. This is why the Dividend Aristocrats can continue to raise their dividends in difficult years, such as the 2020 coronavirus pandemic.
With this in mind, we have created a list of all 66 Dividend Aristocrats. You can download your free copy of the Dividend Aristocrats list, along with important financial metrics such as price-to-earnings ratios and dividend yields, by clicking on the link below:
McDonald’s Corporation (MCD) embodies all of the qualities inherent in a Dividend Aristocrat. McDonald’s paid its first dividend in 1976 and has increased it every year since. The company has now increased its dividend for more than four decades.
McDonald’s has implemented a successful turnaround in recent years, through new menu offerings, remodeled restaurants, and accelerated investment in technology. Put together, these initiatives should help McDonald’s continue to raise its dividend for many years, although the stock appears to be overvalued today.
McDonald’s was founded in 1954, by Ray Kroc and his partners, Dick and Mac McDonald. Together, they formed the McDonald’s System Inc. In 1960, Kroc bought the exclusive rights to the McDonald’s name. Today, McDonald’s operates approximately 39,000 locations, in more than 100 countries around the world.
Revenues come primarily from franchise fees. McDonald’s has accelerated its franchising over the past several years. While this effort initially led to lower sales, it allowed McDonald’s to expand its profitability through higher margins. And with the franchising efforts lapped, McDonald’s is back to reporting impressive sales growth in addition to earnings growth.
On January 27th, 2022 McDonald’s reported the fourth-quarter and full-year 2020 results. For the fourth quarter, total revenue came in at $6.0 billion, representing a 13% increase compared to Q4 2020. Revenue at company-owned restaurants was up 14%, while revenue from franchised restaurants –which has notably higher margins –increased 14%. On an adjusted basis earnings-per-share equaled $2.23 for the fourth quarter, compared to $1.70 in the year-ago quarter.
For the year, McDonald’s generated revenue of $19.2 billion, an 18% increase compared to 2020, as the company has improved tremendously from the effects of the COVID-19 pandemic. Company-owned restaurant revenue was up 20%, while revenue from franchised restaurants was up 22%.
Reported net income equaled $7.5 billion or $10.04 per share compared to $4.7 billion or $6.31 per share in 2020. On an adjusted basis, earnings-per-share equaled $9.28 versus $6.05 in 2020.
Thus, for the full year of 2021, McDonald performed very well as it navigated through the COVID-19 pandemic. For this reason, we expect McDonald’s to continue to grow this year, and beyond.
McDonald’s performance has improved in the past few years, due in large part to the strategic initiatives put in place to restore growth. These initiatives are working well and put McDonald’s in a good position to continue growth moving forward.
First, McDonald’s sees the potential to grow its unit count in the next couple of years.
Source: Investor Presentation
McDonald’s has plenty of additional catalysts for growth. McDonald’s announced new menu offerings, including all-day breakfast which provided a big boost to sales. A renewed focus on providing value to customers has also helped restore traffic. McDonald’s has also embraced technology in recent years, by utilizing new technologies that help get food to customers faster.
For example, it has partnered with third-party delivery services such as Uber (UBER) Eats and GrubHub (GRUB), while it also recently acquired voice technology firm Apprente. Apprente makes artificial intelligence technology that can provide faster and more accurate fulfillment of drive-through orders. McDonald’s has also rolled out mobile ordering as well as kiosks at many of its restaurants to simplify the ordering process even further.
This has helped McDonald’s post strong results in the United States. In 2021, comparable sales in the U.S. increased 13.8%, which is the highest U.S. annual comparable sales ever reported and the seventh consecutive year of positive comparable sales.
We expect McDonald’s to generate 6% annual earnings-per-share growth over the next five years. This growth will be comprised of sales growth and share repurchases.
Competitive Advantages & Recession Performance
McDonald’s enjoys several competitive advantages that separate it from its industry peers. First, it is the largest publicly-traded fast-food company in the world. It has an enormous scale, which allows it to keep prices low. And, it has one of the most valuable and widely-recognized brands in the world.
One of the big reasons why McDonald’s continues to increase its dividend each year is because it has a defensive business model. When the economy takes a downturn, consumers tighten their belts, particularly when it comes to dining. Rather than go to higher-priced sit-down restaurants, consumers will often shift down to fast food during a recession.
From this perspective, McDonald’s actually benefits from recessions. For evidence of this, its earnings-per-share during the Great Recession are shown below:
- 2007 earnings-per-share of $2.91
- 2008 earnings-per-share of $3.67 (26% increase)
- 2009 earnings-per-share of $3.98 (8% increase)
- 2010 earnings-per-share of $4.60 (16% increase)
McDonald’s grew earnings in each year of the recession, at a double-digit compound annual rate. This is highly impressive and speaks to its recession-resistant business model. Investors can be reasonably assured the company can continue raising the dividend, even if another recession hits.
Valuation & Expected Returns
McDonald’s stock has generated huge returns in recent years. For example, in the past five years, McDonald’s stock generated total annualized returns of 21.8% per year. The only downside from this outstanding performance is that the stock now appears to be overvalued. Using the current share price of ~$249 and expected earnings-per-share for 2021 of $10.25, the stock has a price-to-earnings ratio of 24.3.
Over the past decade, shares of McDonald’s have held an average P/E ratio of 21. We consider 20 times earnings as a reasonable fair value estimate. If shares were to revert to a P/E valuation of 20, annual returns would be reduced by 5.2% through 2027.
Therefore, McDonald’s appears to be overvalued, based on relative comparisons to the broader market, as well as to its own historical average. Fortunately, the impact of overvaluation will be offset by earnings-per-share growth and dividends. In addition to expected EPS growth of 6% per year through 2027, the stock also offers a current dividend yield of 2.2%.
Overall, McDonald’s is expected to generate total returns of just 3.0% per year, a weak projected rate of return. The relatively low expected return is due to McDonald’s stock valuation, which is abnormally high at the present time.
McDonald’s has paid a rising dividend for 46 years in a row. Over those four-and-a-half decades, it has had to reinvent itself from time to time, to stay on top of changing trends in the restaurant industry. But it has consistently succeeded in its various turnarounds, a testament to the strength of its brand and business model.
It recently had to do this once again, but the results have been very encouraging. Last year was a great year for McDonald’s, which saw other industries and companies being impacted by the weak global economy. But a continuation of growth is likely for this industry leader in 2022.
That said, investors aren’t likely to see sizable gains with the high valuation of the stock. As a result, we believe investors should avoid the stock and wait for a pullback before buying McDonald’s.
If you are interested in finding high-quality dividend growth stocks suitable for long-term investment, the following Sure Dividend databases will be useful:
- The Dividend Achievers List: a group of stocks with 10+ years of consecutive dividend increases.
- The Dividend Kings List: considered to be the best-of-the-best among dividend growth stocks, the Dividend Kings are a group of exceptional dividend stocks with 50+ years of consecutive dividend increases.
- The Blue Chip Stocks List: contains stocks on either the Dividend Achievers, Dividend Aristocrats, or Dividend Kings list.
- The Monthly Dividend Stocks List: contains stocks that pay dividends each month, for 12 payments per year.
- The High Dividend Stocks List: high dividend stocks are suited for investors that need income now (as opposed to growth later) by listing stocks with 5%+ dividend yields.
The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly: