This fast food giant continues to assert its leadership as it successfully adapts to changing consumer tastes.
The company just completed a major menu upgrade at all of its U.S. outlets. It has also embarked on a major re-franchising plan. In the meantime, the company’s earnings rose in the latest quarter and it recently raised its dividend for the 40th year in a row.
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MCDONALD’S CORP. (New York symbol MCD; www.mcdonalds.com) is the world’s largest operator of fast-food restaurants, with 37,241 outlets in 120 countries. It serves a wide variety of food, but is best known for its hamburgers and french fries.
In the quarter ended March 31, 2018, McDonald’s revenue fell 9.5%, to $5.1 billion from $5.7 billion a year earlier. That’s mainly because the company continues to transfer outlets to its franchisees. Its aim is to have those partners operate 95% of locations, up from 92% currently.
As part of its re-franchising plan, the company recently sold 80% of its 2,700-plus restaurants in China to a group led by a state-owned firm. McDonald’s recorded an $850 million pre-tax gain on that transaction.
Overall earnings in the quarter rose 13.2%, to $1.38 billion from $1.21 billion. Due to fewer shares outstanding, per-share earnings rose 17.0%, to $1.72 from $1.47. If you exclude a charge related to the new U.S. tax rules, McDonald’s earned $1.79 a share in the latest quarter. The new rules also cut the company’s effective tax rate in the latest quarter to 27.1% from 32.8% a year earlier.
In 2018, McDonald’s expects to spend $2.4 billion on new restaurants and improvements. In all, it expects to open 600 new outlets this year (net of closures). That’s up from the $1.9 billion it spent in 2017 on new restaurants and the upgrade of existing locations.
Blue Chip Stocks: Company completes roll-out of fresh beef Quarter Pounders
A key part of the company’s recent success is its ability to adjust its menu, particularly as consumers shift toward more healthful and fresher foods.
As part of that plan, McDonald’s now uses fresh beef for its Quarter Pounder and other premium burgers. That replaces frozen patties. Earlier this year, it began with a test run at 3,500 of its U.S. outlets. This week, the company announced that it had completed the roll-out of fresh beef Quarter Pounders at the rest of its 10,500 U.S. outlets.
The switch should help McDonald’s compete with other fast-food chains that emphasize fresh ingredients, including Wendy’s and Chick-fil-A. As well, test runs showed the company’s outlets can cook fresh burgers just as quickly as frozen ones. That means service times at McDonald’s drive-throughs should remain the same.
Starting with the December 2017 payment, the company raised its quarterly dividend by 7.4%, to $1.01 a share from $0.94. The new annual rate of $4.04 yields 2.6%. The dividend has grown an average of 5.6% annually over the last 5 years. The company has raised its dividend for 40 years in a row.
The company’s additional outlets and lower taxes should push up earnings in 2018 by about 15% to $7.67 a share. The stock trades at 21.4 times that estimate. That’s an acceptable multiple in light of McDonald’s well-known brand and wide geographic operations.
Recommendation in Wall Street Stock Forecaster: McDonald’s is a buy.
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