If you want a cheap stock for your portfolio, look no further. McDonald's (NYSE: MCD) shares have barely risen since March 2023, compared to the S&P 500's 31% surge. The fast-food giant was smashing sales and earnings records coming into early 2024, so that performance is startling.
Definitely some clouds on the horizon. McDonald's has seen reduced spending and sluggish customer traffic in the key U.S. market in recent weeks, and competition is heating up for cost-conscious buyers. After inflation halted, Chipotle is challenging McDonald's drive-thru lead, and pricing pressures are increasing.
Don't allow fears discourage you from buying shares. Today's discounted share price gives McDonald's everything it needs to deliver strong returns. Here are several reasons to adore the stock presently.
1. Cash flow As a stock metric, cash generation would be toward the top. The expression goes, "Cash flow is destiny." Since McDonald's dividend is supported by cash output, this number is much more crucial.
A bright future awaits McDonald's and its dividend. Due of its global sales and brand power, the chain makes more income than competitors. McDonald's generated $7 billion in free cash last year, up from 2022 and 85% of earnings. The company's franchised arrangement means it spends less annually than Chipotle, which owns majority of its shops.
So it's no surprise that McDonald's pays (and raises) a quarterly dividend. The last rise was 10%, and cash flow trends suggest more substantial hikes.
2. Profit edge Fast food is cheap and profitable for McDonald's. Today, its profit margin is reaching a record 50% of sales, considerably above Chipotle and other competitors. That disparity is partly due to its franchise-selling model. McDonald's makes more money from royalties, real estate, and leasing fees than from food markups.
High profit margins and numerous opportunity to generate significant returns on earnings are the keys to great long-term returns. McDonald's has many growth efforts, including lowering wait times and enhancing product quality to improve customer happiness. Online ordering and delivery are also promising.
3. Price is right The best news is that McDonald's share pessimism allows investors to double their capital. At the start of 2024, customer traffic dropped, raising concerns that comparable-store sales gains will halt this year. Wall Street panicked, and the stock is now worth 8 times sales, down from almost 9 times sales in 2023.
Traffic is the most important short-term factor affecting shares. Patient investors can ignore the noise and focus on McDonald's strong earnings growth prospects over the next decade.
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