With the S&P 500 and Nasdaq Composite down year to date (YTD), investors may be seeing many top stocks in their portfolios sell off. But certain companies, like Dow Jones Industrial Average component McDonald's(NYSE: MCD), have been immune from broader market jitters.
In fact, McDonald's is up over 10% YTD at the time of this writing, making it one of the best performers in the Dow this year.
Let's look at what's driving the run-up in McDonald's and whether the dividend stock is worth buying now.
Image source: Getty Images.
McDonald's is projecting sizable growth over the next three years
McDonald's hit an all-time high on Friday after reports that it is implementing artificial intelligence (AI) solutions at over 40,000 locations to make ordering easier for customers and to take some of the pressure off employees.
From touchscreen kiosks to counter, table, and drive-thru services, there are many different ways to place and receive an order from McDonald's. The company has had a ton of success with its mobile app and rewards program, but this has come at the expense of employee efficiency.
McDonald's isn't the only quick-service restaurant trying to fine-tune its mobile ordering. Starbucks has made simplifying the menu and mobile ordering a priority since Brian Niccol took over as CEO in September.
Store improvements are a key aspect of McDonald's Four D's strategy -- digital, delivery, drive-thru, and restaurant development. On the company's fourth-quarter 2024 earnings call, McDonald's said it has 170 million 90-day active users, and systemwide sales to loyalty members reached $30 billion in 2024. Systemwide sales refers to total sales to McDonald's operated locations and franchised stores.
McDonald's expects 90-day active users to grow by 47% in just three years, reaching 250 million by the end of 2027, and systemwide sales to loyalty members to increase by 50% to $45 billion.
If McDonald's can use AI to improve efficiency and get more customers in the door, it could be a monumental improvement for the company. However, the main reason McDonald's stock has been on a tear is likely due to its recession resilience. McDonald's owns and operates around just 5% of its stores. The main business is collecting royalties and rent from franchisees.
Fast food is already more insulated from economic slowdowns than more experience-based food options. However, even if consumers pull back on going to McDonald's, the company's near-term performance will still not change much, thanks to the franchise model.
A highly reliable dividend
In 2024, McDonald's raised its dividend for the 48th consecutive year, putting the company on track to become a Dividend King by 2026. Dividend Kings are companies that have boosted their payouts for at least 50 consecutive years. But dividends are just one aspect of McDonald's phenomenal capital return program. Over the last decade, McDonald's has reduced its outstanding share count by over a quarter, more than doubled its dividend, and more than tripled its stock price.
The McDonald's franchise model gives the company high margins and steady cash flows, making it easy to routinely buy back stock and raise the dividend. At 2.2%, McDonald's doesn't have the highest yield, but it's still a good bit higher than the S&P 500's 1.3% yield.
McDonald's can grow into its valuation in time
McDonald's can be a difficult stock to value because of its franchise model. So, instead of focusing too much on corporate revenues, it's better to look at systemwide sales to gauge customer traffic at company-owned and franchised restaurants.
In 2024, McDonald's systemwide sales rose just 1%. Diluted earnings per share (EPS) fell 1%. A 17% increase in capital expenditures led to an 8% decrease in free cash flow compared to 2023.
Overall, it wasn't a great year for the fast-food giant, but investors seem more focused on where McDonald's could be headed. Analyst consensus estimates call for $12.32 in 2025 EPS and $13.33 in 2026 EPS.
Currency exchange headwinds and weak spending in key markets like China have bogged down McDonald's results. A rebound in international markets and a weakening U.S. dollar would make McDonald's a coiled spring for earnings growth and make the stock a better value. As for now, McDonald's isn't cheap based on trailing metrics, with a 28.4 price-to-earnings (P/E) ratio.
McDonald's forward P/E is close to its five-year median P/E, suggesting McDonald's is a little overvalued right now. But for investors who believe the company can grow into its valuation over time, having an inflated P/E isn't the worst thing in the world.
McDonald's is a balanced buy for risk-averse investors
McDonald's investments in AI could be a game-changer for the company. Its Four D's strategy centers around the customer experience, which can drive sales volumes, support price increases, and accelerate McDonald's global expansion.
The stock isn't cheap, but it's not terribly overvalued. Given McDonald's extensive track record of boosting the payout and its 2.2% yield, it's also a solid source of passive income.
Add it all up, and it's easy to see why investors are flocking to a safe stock like McDonald's amid economic uncertainty and stock market volatility.
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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Starbucks. The Motley Fool has a disclosure policy.
