Although McDonald's (NYSE:MCD) faces a challenging informal eating out (IEO) environment (increased competition and slow economic growth), the company is still able to generate loads of cash and remains steadfast in putting it to good use. McDonald's has a priority of using its cash to reinvest in the business for long-term growth. This includes: modernizing current restaurants to make them more appealing and efficient for customers and developing new restaurants in key markets to expand the company's footprint.
McDonald's also uses its cash to reward shareholders. The company earned its status as a dividend champion by increasing its dividend payments every year since 1976. With a solid track record like that, I would expect annual dividend hikes to continue. The current dividend of 3.1% is higher than the yield of the S&P 500, which currently pays about 2%.
The company also makes use of its cash through share repurchases. Shareholders received $1.1 billion in the form of dividends and share repurchases in the first quarter.
New products are constantly being introduced to create excitement for customers. New products will be introduced in the United States in the following growth categories: chicken, premium beef, breakfast, and beverages. Some of the specific new products include: Egg White Delight, a lower calorie breakfast item; Premium McWraps, an innovation from Europe that is being introduced globally; and Blueberry Pomegranate Smoothies, which originated in Canada. These new items should help in keeping customers returning to the restaurants and lead to sales growth and increased market share.
McDonald's is working on promoting its breakfast menu overseas in the Asia/Pacific/Middle East/Africa region (APMEA) where 30 countries participated in the National Breakfast Day promotion. Restaurants gave away 5 million Egg McMuffins during this event to increase awareness for the breakfast products.
The company is also expanding services such as kiosks, delivery, mid-café, and drive-throughs in the APMEA region. About 50% of the company's restaurants are open for 24 hrs. and 20% offer delivery service. These are a few examples of how McDonald's is striving to maintain an edge in the IEO industry.
Although first quarter commodity costs were flat, McDonald's expects increased costs for the remainder of the year. The full-year cost increase is expected to be 1.5% to 2.5%. This will put increased pressure on margins.
Efforts are being made to modernize the restaurants and the customer experience. Over 1,600 restaurants are expected to be reimaged this year: 800 in the United States, 450 in Europe, and 225 in APMEA. In addition to that, between 1,500 and 1,600 new restaurants are expected to be opened this year throughout the world.
McDonald's is fairly valued on the high end with a trailing PE ratio of 18.72, a forward PE of 16, a PEG of 2.02, and a price-to-book ratio of 6.63. This is higher than the S&P 500's PE of 14 and price-to-book ratio of 2.28. However, MCD looks more attractively valued than its main competitor, Yum Brands (NYSE:YUM), which has a trailing PE of 19.88, a forward PE of 17.92, and a price-to-book ratio of 14.37. Burger King's (BKW) valuation is also on the high end with a trailing PE of 54.73, a forward PE of 19.63, a PEG of 1.28, and a price-to-book ratio of 5.45.
McDonald's is expected to grow earnings annually at 8.72%, which is slightly lower than the expected growth of the S&P 500 of around 9%. Therefore, given that McDonald's valuation is slightly higher than the market and that its expected growth is slightly lower than the S&P 500's expected growth, the stock is likely to slightly lag the S&P 500 index in the next few years. However, the company should remain a consistent dividend paying investment over the long-term.
Disclosure: I am long MCD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.