In This Soft Market, McDonald's Stock Is Worth A Look

  • While the average stock is down 10% during 2016, McDonald's is only down 2%.
  • This is despite McDonald's gain of over 20% during the first year under new CEO Steve Easterbrook.
  • You get a 3% dividend yield and a promise of growth, which makes McDonald's worth considering.
In the wake of a market downturn like the one this January, it’s a good idea to look at your portfolio and see which issues stood up against the storm, and which fell hard. One name that stood up well has been McDonalds (NYSE:MCD). McDonald's stock is down just 2% during the year, meaning it held almost all the 24% gain it made during 2015.

Last year was a big turnaround for McDonald's. New CEO Steve Easterbrook brought breakfast to the menu all day, and began subtle shifts to the company’s image to match a turnaround he achieved earlier in his home market, Great Britain. McDonald’s also benefited, somewhat, from problems at other restaurants, including Chipotle Mexican Grill (NYSE:CMG), a McDonald’s spin-off.

At its present price McDonald’s sports a very high Price/Earnings multiple of 25, but its dividend yields 3.07% on the current price of about $116 during any calendar year. Easterbrook has covered that dividend with ease during the two most recent quarters, and is expected to do so again when McDonald's reports earnings next Monday.

The consensus estimate is for earnings of $1.22/share on revenues of $6.23 billion, easily covering that dividend, and there are whispers that earnings could hit $1.27/share. The company generates about $7 billion in operating cash flow each year.

If you’re familiar with McDonald’s in the U.S., you may want to visit the place when you travel abroad, where you’ll find a wide range of sometimes-strange options geared to local tastes. In Japan, for instance, the company is now rolling out chocolate-covered French fries. The company’s results in Asia were hurt in 2014 by a food poisoning scandal similar to what happened with Chipotle in the U.S.

Easterbrook was brought in last year in order to quell a budding revolt among McDonald's franchisees, who not only pay the company’s advertising costs but its food costs as well. Franchisees recently reported their same-store sales were up 4.1% during the fourth quarter, an impressive result, although many complain it’s at the cost of profits with promotions like McPick, which sells two items for $2.

In addition to his work with franchisees and with serving breakfast all day, Easterbrook is also tackling McDonald’s image for unhealthy food, serving fruit and yogurt with its kids’ meals rather than fries, and launching mini-sliders as a healthier alternative on its standard menu.

Easterbrook has already succeeded in moving McDonald’s out of the stock market dumpster and back into the premium package. When you buy McDonald's stock you’re taking a conservative position, given the dividend, but you are also betting that he can continue bringing growth to the menu. That for me, makes McDonald's a stock worth betting on.

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  • I do not have any business relationship with the companies mentioned in this post.
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