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McDonald's: Shifting Business Model Creates Opportunity For Investors

Black Coral Research profile picture
Black Coral Research


  • McDonald’s has always been a favorite in the dividend community. Today, it is riding high on strong earnings driven by solid comparable sales growth and the benefits of re-franchising.
  • In our view, McDonald’s Experience of the Future initiative is the natural progression of its re-franchising strategy as it shifts from a Restaurant Operator to an Intellectual Property Licensor.
  • We believe that McDonald’s earnings will continue to grow strongly for the foreseeable future and present the case for how the stock could appreciate 15-22% above the current level.


McDonald’s Enters the 21st Century

The typical consumer experience at McDonald’s (NYSE:MCD) involves either waiting in a queue or going for a drive-thru at one of its many outlets. However, in an era where companies like Amazon (AMZN) are looking to delivering goods to customers using drones and when payments can be made through services like Apple’s (AAPL) Apple Pay, McDonald’s methods of bringing its All-Day Breakfast and French fries to its customers seems increasingly ‘last century'.

Enter CEO Steve Easterbrook’s Experience of the Future initiative (or “Experience” for short), which adds technological flair to the Golden Arches’ fast-food staples through touch screen ordering kiosks, app-based mobile ordering, partnerships with third party delivery services.

The idea behind these initiatives is to adjust to customers’ lifestyles today – with customers increasingly focused on convenience and frictionless interaction – while bringing McDonald’s classic menu to people more quickly (and perhaps more frequently).

McDonald’s hasn’t limited its initiative to the United States – it has rolled out its Experience initiative to markets as far away as Hong Kong – so the intent is clearly to make Experience its new standard of service.

The Experience initiative isn’t all about optics either – this was clearly intended to help drive future earnings growth. Wells Fargo has estimated that it could drive a 1% bump in comparable sales next year based on the mid-single digit growth in same-store sales at the Canadian and UK outlets where Experience has been rolled out.

Dividend and Recent Stock Performance

This is music to the ears of investors who are currently enjoying McDonald’s $3.76 annual dividend – which works out to a 2.5% dividend yield. Among restaurant stocks, McDonald’s has the distinction of being the only blue chip with a yield that is 70-basis points better than the industry

This article was written by

Black Coral Research profile picture
Black Coral Research, Inc. is a newsletter designed to inform Dividend Investors how the latest news could impact the dividends of the companies they invest in. Feel free to contact us at BlackCoralResearch@gmail.com

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in MCD over 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.

Black Coral Research, Inc. is a team of writers who provide unique perspective to help inform dividend investors. This article was written by Jonathan Lara, one of our Senior Analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article. Black Coral Research, Inc. is not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. Investing involves risk, including the loss of principal. Readers are solely responsible for their own investment decisions.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (5)

dividendhigh is high on MCD for many years now- last payday $3658- and increasing nicely every year. Started buying in 2009 after a trip to Tokyo where I enjoyed a burger and fries- but had to pick one of three restaurants on three of four corners! Stop bad-mouthing MCD- it is a very well run operation!
@fegroup profile picture
Some of this stuff will work, some of it won't. Kiosk ordering has already failed in the sense that two years ago all the CEO could talk about was a line of sandwichs called "Create Your Taste" where customers ordered on kiosks and wait ten minutes for their food. That program is gone to be replaced by quicker "Signature" sandwiches.

Mobile order and pay will work if they can get it off the ground. The problem with that process is that the customer will expect their order to be ready when they walk in the door and that can't happen. But the world is going there and McDonald's must follow.

All these bells and whistles will be impeded by kitchen complications. Since this upper management team has no restaurant experience they continue to add complexities to the kitchen operation which will slow service and reduce customer counts.

Commissaries? give me a break. Franchisees spend millions to remodel their locations and a commissary operated by someone else is going to deliver food into their trading area? Budget a few billion $$$ for continuous litigation with franchisees.
John Gordon profile picture
This was a nice discussion piece, but $MCD's Experience of the Future absolutely depends on franchisee EBITDA, profits, debt service, CAPEX and free cash flow adequacy. Much more analysis on these topics required, especially for a 95% plus franchised chain.

John A. Gordon
$7 value meals in vegas and very slow service and cold food. These analysts that make millions and never leave their three star eateries are lost as usual. Habit burger has $4 burgers that are five hundred times better, not to mention five guys, in-and-out, shake shack and tons of others.
Obviously written by some financial analyst that does not really understand this business. Flashy technologies and delivery etc. are more likely to appeal to higher end consumers, not the typical MCD customer. The idea that people will flock to MCD so they can order the same old food at a kiosk in the lobby or to deliver a $6 extra value meal is laughable. The higher end customer avoid MCD like the plague

At a recent visit in Florida, there were 9 people waiting in line with some people leaning on the kiosk. Not sure they really understand their customers.
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