- McDonald's has lost a lot of market share to competitors like Chipotle and Shake Shack over the past few years.
- A recession could help McDonald's regain lost market share due to its ability to scale at competitive prices.
- Corn and Wheat prices seem to have bottomed along with the rest of the commodity prices a few weeks ago.
- This could affect the price of pork and beef adversely.
- The company has committed to $49 billion of buybacks and is expected to announce growth in same store sales in Q3 of this year. We could be near an inflection point for McDonalds stock.
McDonalds (NYSE:MCD) is finally starting to gain attention from investors as the stock is already up 7%+ year to date which is far better than the S&P 500 which is down almost 4%. However McDonald's has gone through a very difficult time recently with revenues peaking in 2013 at $28 billion and declining every quarter since. However because of the stagnation since 2013 (when the company paid out a $0.77 dividend), this stock offers an excellent opportunity for the long term "value investor" (now currently paying out a $0.85 dividend).
McDonald's Dividends And Buy-backs
Warren Buffet loves dominant companies that stagnate over time, and in the case of McDonald's, in that time period (2013-present), McDonald's has increased its dividend pay-outs and also its share buyback schemes. When you combine the buybacks which give the investor the opportunity to own a bigger percentage of the company and the increasing dividend which enables the investor load up on more undervalued McDonalds stock, it's a win win for the investor in the long term. McDonalds has committed to return up to $49 billion to shareholders by 2017 through dividends and share buybacks. The company has increased its dividend for the last 37 years which is why it still has a strong loyal shareholder base. I like the changes this company is making with its new management
and furthermore I believe global macro events may help this McDonalds shares going forward. let's discuss.
Macros And Commodity Prices
Firstly on a macro level, I feel this McDonalds stock is better positioned than its competitors. Chipotle Mexican Grill (NYSE:CMG)
for example is a stock that is up over 1100% since 2009 and is definitely one of the principal companies which have taken market share away from McDonald's in the US. The US since 2009 has enjoyed lower unemployment rates, higher home prices & higher consumer spending which seem to have benefited more expensive fast food outlets better. Combine this with the unhealthy perception label of its food that McDonald's is trying hard to shake off and it is easy to see why McDonald's growth has been non existent in the past few years. However things may be about to change. There is a strong possibility that the US could be in recession fairly soon when you see the disastrous economic numbers that were reported recently. If the US economy were to deteriorate from here, I would see McDonald's gaining back lost market share because other chains just wouldn't be able to compete with it on price. Fast casual restaurants (Like Chipotle) would soon have to become fast food restaurants in order to keep revenues elevated which would be difficult as many of these chains have the customers sold on the quality of their produce.
Secondly there is strong possibility that the whole commodity index has bottomed out, which means the soft commodities (wheat and corn) should see far higher prices in the future. Wheat in fact has rallied strongly out of its low on the 3rd of September showing a 6%+ gain already. Grain prices are directly linked to the price of beef and pork, so expect to see higher prices at restaurants if this trend continues. When you combine higher beef prices with an economic contraction, it spells trouble for fast casual restaurants because of their more expensive menus.
Furthermore, my number one rule in investing is to protect the downside. In the crash of 2008 and 2009, McDonald's earnings per share actually rose by 8%, and its revenues had recovered completely by 2010 (see chart below).
So Why Pick McDonalds Stock?
So why McDonald's and why now? Well I just believe that something good will come from its Q3 earnings which will be announced on the 22nd of this month where guidance is indicating that global same store sales will rise. Its 3 year dividend growth rate is 9% which is very impressive when you take into account the recent struggles this company has had. Its 10 year dividend growth rate is almost 20% which illustrates how well the company rewards shareholders when it has increasing cash-flows.
Furthermore the company wants to free up cash flow even more by re-franchising 3,500 locations by the end of 2018 which should bring the company closer to its goal of having 90% of its stores operating under the franchisee system. What does this mean for shareholders? Well I expect to see McDonalds stock price rallying from these levels plus stronger dividend growth rates in the years to come. The amount of market research this company has done recently has been huge and it is only a matter of time before its new initiatives (all day breakfast, create your taste, etc) gain traction. I know it sounds counter-intuitive but watch US economic numbers as this company should thrive in a recession. We see this trend in Europe where Germany has returned to growth despite having far less economic growth rates compared to the US. 40% of the company's revenues come from the US so if the all day breakfast initiative could be as successful as the existing breakfast, then the US market could return to growth.
To sum up, this stock is an excellent defensive dividend recession proof stock. If the Fed prints more money, equity markets will continue to rise in which McDonald's will participate. We actually could have a rising stock market at the same time as a recession. However I'm confident that McDonalds will be one of the few who will able to generate increasing cash flows and reward shareholders in the process.