After being range-bound for about five months, McDonald’s (NYSE:) stock broke to the upside in a big way in March 2021. The stock has flattened in the last month but it’s still close to its all-time high. With a new earnings report on the horizon, it’s time for investors to decide whether to take a bite.
My advice is to buy first and ask questions later. McDonald’s flexed its strength during the pandemic. Consider that 2020 revenue was down “only” 8% from 2019. And the company’s 2021 first-quarter revenue was higher than both 2020 and 2019.
Naysayers will point out that earnings did not fare as well as revenue. The $6.05 EPS McDonald’s posted for 2020 was 22.9% lower than the $7.85 EPS it delivered in 2019. However, that was largely due to its second-quarter posting of 66 cents per share. This was the first full quarter into the pandemic. Earnings have rebounded nicely since then. And in the first quarter of 2021, earnings were on par with 2020 and higher than 2019.
Investing In Their Employees
McDonald’s employs 800,000 people which makes it an economic indicator in and of itself. I joke of course, but there is a sense that as goes the Golden Arches so goes the economy. So with McDonald’s announcing it is raising wages from $11 to $17, that’s a big deal.
If raising wages is only a starting point. McDonald’s is also expanding benefits to include a combination of payments for education, child care, and eldercare.
You can question what this means for the broader economy or society. But if you’re an investor this is good news. If McDonald’s becomes a potential career option as opposed to a part-time job, it will radically change the perception of what is largely still viewed as a gig job.
But won’t that raise operating costs? Maybe in the short term. But even with pandemic restrictions easing some franchise owners are finding it difficult to boost staff to open dining rooms. And the larger question is why would they? In small-town America where I live, our McDonald’s frequently has long drive-in lines particularly for the breakfast rush and when school lets out.
Plus, McDonald’s continues to invest in technology. Even prior to the pandemic in-store kiosks and a mobile app were changing the perception if not the actual dining experience. With the prevalence of food delivery services, the reality is that many individuals want fast food to come to them.
Familiar Food Leads to Predictable Revenue
One of the frequent arguments I hear against owning McDonald’s stock is the quality of the food. This has been an argument that, like many faux arguments, has been around for more than 30 years. A related argument says that individuals will be unwilling to pay more for “fast food.”
However, when a company generates as much revenue as McDonald’s does despite an endless number of competitors threatening to take its market share, at some point you have to find different arguments.
I’m not here to argue that eating McDonald’s is part of a balanced diet. Nor am I advocating paying $10 or more for a value meal. I personally don’t eat at McDonald’s very much because I’m older and don’t have the metabolism I once had.
But I’m only pointing out that what individuals say they’re going to do and what they actually do frequently don’t match up. People are still eating at McDonald’s even if they hate themselves for doing so.
As an investor this means, as the pandemic showed, that you can count on McDonald’s for predictable revenue and predictable profits.
McDonald’s is a Dividend Darling
If you needed one more reason to buy McDonald’s, it’s never a bad idea to remind you that that the company is a Dividend Aristocrat. It has increased its dividend for 45 years and it’s unlikely that streak will end anytime soon.
The consensus price target of 28 analysts is for MCD stock to go to $250. However, recent analyst price targets have the stock going significantly higher. That should give you an idea about where earnings are headed. Which may be the only reason you need.