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Blue-Chip McDonald's Serves Up Recession-Proof Dividend

Blue-Chip McDonald's Serves Up Recession-Proof Dividend
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Tuesday, 22 October 2019 04:55 PM Current | Bio | Archive

Dividend investors are generally looking for three things when selecting a stock.

First, they want a stock with a meaningful dividend yield. Second, they typically want a dividend that is growing at least in some capacity, increasing their dividend income over time. Third, dividend investors typically buy stocks with safe dividends that don’t have a high risk of being cut, even during a recession. This provides additional safety to the investor’s income stream, and increases the attractiveness of the stock.

One such stock that fits all three of these criteria is McDonald’s (MCD), which has increased its dividend for 43 consecutive years. We believe McDonald’s dividend is secure, even during a recession. The company has proven it can pay and raise its dividend during any economic climate, which is why we view McDonald’s as a top-tier dividend stock.

McDonald’s: An Elite Operator

McDonald’s is the largest fast food chain in the world with nearly 40,000 locations in more than 100 countries. The chain produces about $21 billion in revenue annually, most of which is derived from franchise fees, as only about 7% of the company’s units are company-owned. McDonald’s trades for a market capitalization of $158 billion after a strong rally in the stock in 2019.

The company has reinvented itself in recent years after some years of stagnating growth. McDonald’s has revamped its menu in a variety of ways, including premium coffee drinks, all-day breakfast, premium entrees, and more. Over time, these initiatives have boosted the company’s traffic and average ticket prices, which have driven comparable sales and earnings much higher.

McDonald’s has averaged 8% annual earnings-per-share growth since 2008, a very impressive number given the company’s size and scale. In addition, that time frame includes the company’s struggles in 2013 and 2014, when earnings actually declined. Today, however, is a very different story as McDonald’s menu innovation and store remodels continue to drive very strong comparable sales and margin gains. We believe McDonald’s can produce 6% long-term annual earnings-per-share growth due to its current momentum. The company should be able to produce this growth from a combination of comparable sales gains, margin gains through expense leverage and a higher mix of franchise fees, as well as share repurchases.

Recession Performance

Restaurant stocks in general do not perform well during recessions. Restaurants, by their very nature, are discretionary purchases for consumers. This means that consumers on the margin may lose the ability to afford to eat at restaurants during a recession. Indeed, even those consumers that can afford to eat at a restaurant during a recession may simply choose not to. This happens during each downturn; industry-wide sales fall precipitously and the weaker operators see enormous earnings decline, or even go out of business.

McDonald’s is different, however. Its focus on value affords it the ability to not only survive a recession, but thrive. The company’s earnings-per-share rose 27%, 26%, and 8%, respectively, in 2007, 2008, and 2009, when many companies from a variety of industries struggled. This outstanding recession performance is part of what makes McDonald’s a very strong dividend growth stock; when earnings grow irrespective of economic conditions, investors can sleep well at night knowing their dividends are safe.

The current payout ratio is just over 60%, so while it is higher than it has been in recent years, that is because McDonald’s can afford to spend more on its dividend thanks to very strong free cash flow generation. This cash flow helps it to service its $33 billion in long-term debt, which we don’t see as favorable by any means, but we also think McDonald’s is more than capable of servicing it, even during a recession.

Final Thoughts

McDonald’s has proven to be an elite dividend stock over time. We believe it will be able to raise its dividend irrespective of economic conditions for many years to come. Its current yield of 2.4%, relatively low payout ratio, strong earnings growth outlook, and outstanding recession performance create a very safe dividend stock for the long-term.

Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.

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BenReynolds
We believe McDonald’s dividend is secure, even during a recession. The company has proven it can pay and raise its dividend during any economic climate, which is why we view McDonald’s as a top-tier dividend stock.
blue, chip, mcdonald’s, recession, proof, dividend
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2019-55-22
Tuesday, 22 October 2019 04:55 PM
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