How We View McDonald's After COVID-19 Financial Update

Wide-moat McDonald's (MCD) April 8 COVID-19 financial update left us with two questions. First, with comps swinging from 7.2% growth during the first two months of the first quarter (demonstrating the positive impact of its various remodeling, digital, and delivery initiatives) to a decline of 22.2% in March, what sales trends can investors expect over the near term? Based on restaurant operating restrictions (including temporary closures in markets like France and the United Kingdom) that we expect to last into May and June, we now expect a 30%-plus comp decline in the second quarter, followed by mid-single-digit declines for the rest of the year.

Second, by cutting 2020 capital spending plans to $1.4 billion versus initial guidance of $2.4 billion as it pares back remodels and global store openings, deferring franchisee rent and royalty cash collection in most markets, securing $6.5 billion in new funding in the first quarter, and suspending its share buyback program in March, does the company have sufficient liquidity to fund operations while maintaining its dividend? As we've said in previous notes, this will depend on the length of restaurant operating restrictions/closures, but based on our aforementioned sales forecast and expectations of a low-double-digit decline in operating income (around $8 billion for the year), we believe the company can maintain its dividend, which would require $3.5 billion to stay consistent with last year's payout.

We still view McDonald's dividend as one of the safest in the industry but concede there is risk of a cut if operations are restricted past June or there is political pressure stemming from U.S. franchisees collecting federal government support. In this scenario, we'd still expect McDonald's dividend payout ratio to remain ahead of industry averages.

We plan to revise our near-term sales estimates, but we don't expect a material change to our $205 fair value estimate. We continue to see shares as significantly undervalued.