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McDonald's Corporation (MCD): Stock Near 52-Week High - Growth And A 3% Dividend

 July 18, 2013 01:32 PM

(By Michael Vodicka) The first quarter report in May showed mixed trends for McDonalds Corp. (NYSE: MCD). The company reported higher revenues and earnings per share for the quarter while comparable sales and operating income declined. Global comparable store sales and consolidated operating income each dropped 1% while the world's largest restaurant chain's earnings per share were at $1.26, up 2% from the year-ago numbers. Revenues rose only 1% year-over-year to $6.61 billion during the quarter. A slow quarter has, however, only made the company take a harder look at its strategies. In the last year, McDonalds has been charting out a path to build market share and sustained growth.

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For starters, the company has shifted its focus back to its core menu. It has restructured its US menu to include new innovative products, such as healthier options like egg-white sandwiches, while removing the less profitable items. The McDonalds menu had 85 items in 2007, which has since grown to 145. The company intends to streamline the items and make the menu much shorter and simpler for its customers. The return of the Dollar Menu should also provide the company a boost in the difficult US market.  But in spite of the slow-growth domestic market, McDonald's stores open for at least 13 months rose 2.6% in May as the Dollar Menu and breakfast items drove the US business.

[Related -McDonald's Corporation (MCD) Q3 Earnings Preview: Just Huggin’ It]

McDonalds is also carrying on with its expansion plans despite the gloomy economic outlook.  Capital spending on new units and modernization totaled $2.6 billion in 2011, increased to $2.9 billion in 2012 and is expected to top $3 billion in 2013.

McDonalds is taking a targeted approach to its expansion strategy, focusing on high-growth opportunities in emerging markets.

Analysts estimate China's fast-food industry to rise 14% in 21013 to $18.7 billion in 2013 and McDonalds is in position to capitalize on this trend. It plans to raise its number of stores to 2,000 by the end of this year. In tandem with its expansions plans, McDonalds also recently announced plans to hire 75,000 new employees in China by the end of the year. The company also recently announced the opening of its maiden outlet in Vietnam early next year.

McDonalds is also making strategic adjustments to its business model, launching an initiative to increase the number of franchise owned restaurants. Of the 34,000 restaurants worldwide, 81% are franchise owned. But McDonalds wants to grow that number in order to create a steadier stream of revenue based on rents and royalties. The franchise model also provides McDonalds with insulation against higher food costs, providing additional margin strength and stability.

McDonalds is also shareholder friendly, paying a dividend since 1976. McDonald's currently boasts a dividend yield of more than 3%.

The company's steady growth in the US and growing presence in emerging markets has produced solid gains on the chart. McDonalds is up 71% in the last five years and trading near its 52-week high.

Analysts are bullish on McDonalds, calling for earnings growth of 6% in 2013 and 10% in 2014. In the next five years, analysts expect annual earnings growth of 10%.

But in spite of the bullish outlook, McDonalds forward PE of 18 is below its peer average of 20.

The takeaway

McDonalds is the world's largest restaurant chain with over 34,000 locations in 150 countries. Its massive size creates huge barriers to entrance for competitors and a platform to expand into high-growth emerging markets. Steady earnings growth and solid 3% dividend yield make McDonalds one of my favorite blue chips. The company reports Q2 earnings on July 22.

*For more top stock picks and analysis, check out a 4-week free trial to Michael's premium newsletter the iStock Growth Trader. The iStock Growth Trader is loaded with the hottest trends, the best stocks and detailed analysis that will keep your portfolio one step ahead of the game.


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