McDonald’s (MCD) reported earnings on 10/24/2017 before the opening bell. EPS for the third quarter came in at $1.76, a penny short of expectations. This was a 7% gain over last year’s third quarter. Revenue of $5.75 billion topped estimates by $10 million, though this was more than 10% below Q3 2016 tally. Operating revenue rose 44% year over year. Consensus for global same store sales was 4.5%, but McDonald’s posted a 6% jump in same store sales. Guest counts were up 2.4%. Higher sales and guest counts tells us that more people are choosing to eat McDonald’s more often. Let us discuss:
What Drove Comp Sales
That is a very encouraging sign for McDonald’s stock. In the U.S. comparable store sales were up 4.1%, easily besting estimates of 3.4%. Remember, this number includes stores that were impacted by hurricanes in Florida and Texas. This improvement in sales bests the average quick service options. Stronger sales helped offset a rise in labor and commodity costs. Commodity costs climbed 1.5% in the U.S. and more than 2.5% in international markets. Restaurants in the U.S. saw a decline in margins from 16.9% in last year’s third quarter to 15.5% in Q3 2017. On a positive note, MCD says that customers who are offered discount or meal deals make more frequent trips to their stores. For example, $1 beverage and McPick 2 deals were credited as being a big driver of traffic during the quarter.
One thing helping McDonald’s stock is that international Lead markets same store sales grew 5.7% versus an expected 4.2%. The United Kingdom, in particular, was singled out as a bright spot. In the U.K., McDonald’s drove traffic to stores with their take on a traditional English pub burger. By tailoring menu offerings to local tastes, McDonald’s is driving higher guest and ticket counts. The company is seeing this play out in other countries such as well, such France, Italy and Canada. High growth markets, such as China, grew 6.2% in the quarter. Currency exchange actually benefited the company in the quarter, adding 2 cents to EPS. Management said that the 4th quarter earnings per share should see a positive currency impact of $.04-$0.06.
One way McDonald’s stock is benefiting is that the company is helping to drive traffic to stores is by using mobile order as a way to entice customers to visit their local Mickey D’s. The company plans to have mobile order available to all 14,000 restaurants in the U.S by the end of 2017. Delivery is now available in 5,000 stores in 20 countries. McDonald’s plans to double this number by the end of the year. In the U.S., MCD’s partnership with UberEATS now offers delivery from 3,700 restaurants, with a goal of reaching 5,000 stores by year’s end.
One interesting point to highlight is MCD’s effective tax rate year to date is just under 33%. McDonald’s would be a beneficiary of the corporate tax rate being lowered to the 20% figure that is being proposed by Congress. Of course, that is a big “if” because Congress and the White House have shown to be fairly incapable of actually accomplishing much.
McDonald’s has raised its dividends for more than 4 decades in a row, with the most recent raise occurring at the end of September. That raise was just under 7.5%, which is very close to the company’s average increase of 7.4% over the past 5 years. While some investors might not be impressed with a single digit dividend raise, this raise actually makes me bullish on the stock. From 2013-2016, McDonald’s raised their dividend approximately 5% every year. A slightly larger increase tells me that the company is expecting earnings to continue to improve going forward. An improvement in earnings means more available capital to return to shareholders. In fact, management said just this on the conference call. CFO Kevin Ozan said that the dividend increase “reinforces our confidence in the company’s long-term strategy and our expectation to return $22 billion to $24 billion to shareholders for the three-year period ending 2019”. Management is telling investors that they feel the next three years are going to be very profitable for the company and that shareholders are going to see that profit returned to them in the form of dividends and buybacks. This type of capital returns makes me believe that this 7.5% dividend increase is just the tip of the iceberg for McDonald’s Stock.
These are just a few reasons we want to own McDonald’s Stock. It has been a winner, and while McDonald’s stock will move up and down, over the long run, its great for any retirement account.
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