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McDonalds Stock Price Extends Upside Momentum; Dividends are Safe

McDonald’s (NYSE: MCD) stock price rallied 23% since the start of this year. The stock is up 34% in the past twelve months, extending the three-year rally to 88%. The substantial share price rally is supported by investor’s confidence in its strategy of enhancing the customer experience and providing innovative menu offerings.

MCD McDonald's Corporation weekly Stock Chart

Its financial numbers have also been improving on the back of increasing customer’s confidence in McDonald’s restaurants. This is evident from the 16 consecutive quarters of global comparable sales growth.

Its global comparable sales rose almost 6.5% in the second quarter amid sales growth across all segments. McDonald’s has generated a system-wide sales growth of 8% in constant currencies. In addition to sales growth, its strategy of lowering outstanding shares is adding earnings growth. The company has generated earnings per share growth of 8% Y/Y in the second quarter.

McDonald’s President and Chief Executive Officer Steve Easterbrook said, “By putting our customers at the center of all our efforts to run great restaurants, enhance the customer experience and provide delicious menu offerings, we will continue to successfully execute our Velocity Growth Plan.”

Along with share price appreciation, the company has also been returning significant cash to investors in the form of dividends and share buybacks.

It had returned $2 billion to investors in the form of cash returns in the latest quarter. Its dividends are safe as cash flows are offering a complete cover to dividend payments. Its operating cash flow of close to $8 billion in the second quarter was more than enough to cover dividend payments of $3.44 billion.

On the negative side, McDonald’s stock price does not offer an attractive entry point for new investors.

Its stock has already gained substantial value in the last three years. Consequently, its valuations turn higher compared to the industry average. The stock looks expensive trading around 8 times to sales and 28 times to earnings compared to the industry average of  2 and 20 times, respectively.

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Based in Saudi Arabia, Siraj has a strong understanding of and passion for accounting and finance. He has worked for international clients for many years on several projects related to the stock market, equity research and other business, accounting and finance related projects. Siraj is a published financial analyst on the world's leading websites including SeekingAlpha, TheStreet, MSN, and others.