Growing or Not, McDonald's Can Satisfy Investors
With its affordable and adaptable lineup of fast food, McDonald's may entice investors as an international growth play -- delivering its food across a global platform that leverages strong economies to compensate for temporarily weaker ones. But as evidenced by its recent earnings report, McDonald's isn't finding the big-time sales gains one might expect from its newer markets. Back near our shores, the company struggles with swift-changing consumer taste and nutrition preferences. So, if the growth story isn't proving too appealing, should investors look elsewhere to spice up their portfolios? The answer depends on what one seeks from an investment.
Big taste, meager earnings
For its fiscal third quarter, McDonald's was able to post a 5% gain in its bottom-line profit, though the top of the income statement failed to impress investors and analysts. Net income hit $1.52 per share, up from $1.43 per share in the year-ago quarter and $0.01 ahead of analyst estimates. Net revenue, however, gained just 2% -- up to $7.32 billion from $7.15 billion last year. The Street wanted about $10 million more.
The U.S. showed negligible gains, while the company's ever-important Middle East, Asia-Pacific, and Africa segment actually declined year over year.
The company is in the midst of renovating its menu in many ways -- trying to build a bigger breakfast business, offering healthier choices, and testing out new concepts such as Mighty Wings -- the company's second acknowledgment that chickens have bones in their natural form (it's tried wings once before). In the recent past, the company's biggest success has been its 10-year-old Dollar Menu, which is now being expanded to include $2 and $5 Dollar & More choices.
The market was thoroughly ambivalent, sending the stock down marginally and creating further doubt as to the future performance of the company. On a growth level, the market may be right: McDonald's is going to have a hard time growing with pressure coming from competition and health advocates (not to mention macroeconomic issues). But at the same time, the stock may still appeal to investors seeking something other than capital appreciation.
Despite McDonald's iffy quarter, the company again increased its dividend payout: up 5% to $0.81 per share, quarterly.
Top-line sales and bottom-line earnings may not be skyrocketing any time soon, but the company still generates plenty of cash. Management is dedicated to shuffling all free cash flow to shareholders, first in the form of dividends and then the less-appealing share buybacks.
As an income play, McDonald's isn't so bad. The company pays a 3.4% yield, and the stock isn't valued richly, as the market seems to expect little from the company in coming periods. The stock may not be set to shoot up any time soon, but what's more important is downside protection. At around 15 times forward earnings estimates, McDonald's is priced reasonably.
Investors need to alter their view of the company from an international grower to an income play. Management is still trying to find ways to grow its markets around the world, and over time things should improve -- so consider the possibility of capital appreciation as a bonus to the quarterly income.
The article Growing or Not, McDonald's Can Satisfy Investors originally appeared on Fool.com.Fool contributor Michael Lewis has no position in any stocks mentioned. The Motley Fool recommends McDonald's. The Motley Fool owns shares of McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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