These Trigger Events Could Send McDonald's Stock Soaring

| About: McDonald's Corporation (MCD)
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Summary

McDonald’s has been dead money for the past year, but that could be coming to an end.

The company has several looming catalysts that could send shares surging in 2017.

A special dividend or new share buyback program could help shares in the New Year.

The Dow Jones Industrial Average posted its best annual gain in three years, with most of the index's components producing double-digit returns.

That's the good news.

The bad news? There have been a few clunkers, too.

Case in point: McDonald's Corporation (NYSE:MCD).

Shares of the burger giant have produced a yawn-inducing total return, including dividends, of about 3% in 2016. That number is especially troubling when you consider that the broader Dow index soared 13%.

Why the lousy performance? For one thing, investors have shifted to faster-growth names during the bull run. Consumer staple stocks like McDonald's were left behind. For another, analysts worry that the strong U.S. dollar will crimp the company's bottom line.

On top of that, wages are rising. Nearly half of all states will increase their minimum wages in 2017. And regardless of your political views on the topic, a tighter labor market is pushing up salaries across the board. Bad news if you employ a lot of workers.

So is it time to dump McDonald's stock? Not really.

The fact is, the outlook for the company is still solid. Despite the short-term headwinds, McDonald's has three "trigger events" that could lift shares over the next year. Let me explain.

This Could Send McDonald's Stock Soaring

Firstly, McDonald's is revamping its business.

The company is moving towards a franchise-heavy model with plans to re-franchise 3,500 restaurants by the end of 2018. This will take the total franchise restaurants in the system to 90% from the current 81%.

The move is a big win for shareholders. Running restaurants is a low-margin, capital-intensive business. But by shifting to a franchise model, McDonald's can earn rich royalties from partners. Meanwhile, it's store owners who must front all of the capital. The move, along with other cost cutting measures, could trim expenses by as much as $500 million.

Secondly, McDonald's is also selling off its 2,400 or so restaurants in China and Hong Kong.

So far, a group led by CITIC and Carlyle Group LP seem to be the front-runners in negotiations, though there may be other bidders in the process. Leaks of the sale price for the Chinese business has been rumored to be around $2 billion, and the deal is expected to be completed early this year.

Any sale could be a big catalyst for McDonald's stock. The company has stumbled in China, hampered by supplier issues and lackluster growth. Exiting the country would allow management to focus on more lucrative operations. And as soon as McDonald's completes the deal, it will likely spur optimism on how the company will allocate its newfound windfall.

Finally, McDonald's stock could become a dividend machine in 2017.

Shares currently yield 3%. That was okay when the company was growing at a double-digit clip, but today McDonald's is becoming a mature cash-cow. In order to keep investors away from faster-growing names in the restaurant space (cough… cough... Starbucks (NASDAQ:SBUX)), the company has to reward them even more so relative to competitors. I wouldn't be surprised to see management materially hike the company's quarterly distribution.

A special dividend could also be in the cards. It's time for executives to thank investors for holding on strong, especially after a year where the stock just traded sideways. Given the company's strong balance sheet and a move toward a mostly franchisee-heavy business model, it has the capacity to offer a larger share buyback or a massive one-time payout.

Of course, McDonald's stock is no slam dunk.

Competition is as intense as ever. A higher minimum wage could eat into margins.

The U.S. dollar has surged in the wake of Donald Trump's surprise election win. To make matters worse, the Federal Reserve surprised markets at its meeting last month by hinting it would likely hike rates three times next year. All of this means the profits McDonald's earns overseas are worth less when converted to greenbacks.

But while these are real problems, I'm not too worried. The U.S. dollar is coming off one of its strongest performances in years. We're far more likely to see some stabilization or reversion to the mean in 2017.

McDonald's is also pulling out all the stops to protect profits. The company is rolling out touch-screen ordering kiosks, which means fewer employees in each location. The launch of premium-priced espresso, lattes and mochas could also boost margins.

The Bottom Line on McDonald's Stock

So is it time to give up on McDonald's stock? Hardly.

While McDonald's has been dead money for the past year, this slow period might be coming to an end. The company has a number of catalysts that could launch shares in the New Year.

If McDonald's can transition from a growth darling to a cash-cow, it could impress Wall Street analysts and reassert itself as a top dividend stock in 2017.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.