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McDonald's Leads with New Promotions, Dividend Increase

We expect to increase our fair value estimate for the wide-moat fast-food chain.

We believe investors should focus on three topics coming out of wide-moat McDonald's MCD better-than-expected third-quarter sales update. First, U.S. comps of 4.6% (versus Consensus Metrix market expectations of 2.7%) were the clear highlight and reaffirm that strategies put in place to navigate coronavirus-related disruptions have long-term potential. Notably, McDonald's Travis Scott celebrity meal promotion helped to jump-start comps in September (double-digit growth, including positive comps across all dayparts including breakfast), and we believe much of this momentum will persist into the fourth quarter with the recently announced J Balvin meal. While promotions deserve credit for the top-line outperformance, we believe menu innovations like Spicy McNuggets as well as digital ordering and drive-thru enhancements have been solid contributors to recent performance, helping to drive average order size and dinner daypart strength.

Second, we believe the U.S. playbook can be adopted in international markets. The internationally operated and international developmental licensed segments posted comp declines 4.4% and 10.1%, respectively, up from 41.4% and 24.2% declines last quarter. While temporary restaurant closures make a return to positive comps unlikely in the fourth quarter, we expect to see international markets adopt similar strategies as the U.S., helping to accelerate segment comps in early 2021.

Last, the board has seen its fundamentals stabilize enough to increase its quarterly dividend by 3% to $1.29 per share ($5.16 annualized, representing a current yield of 2.3%). While this is below the 10% average annual increase we've seen over the past three years, we expect McDonald's to return to roughly this pace beginning in 2021.

We plan to increase our $215 fair value estimate by a few dollars to account for the third-quarter upside and more optimistic near-term comps. Shares appear fairly valued, but we don't see many negative catalysts on the horizon.

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About the Author

RJ Hottovy

Sector Strategist
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R.J. Hottovy, CFA, is a consumer strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is responsible for consumer discretionary and staples research. He has covered the consumer sector as an analyst and director of global consumer equity research for Morningstar since joining the company in 2008, and specializes in a broad range of consumer categories including restaurants, footwear and apparel retailers, consumer electronics retailers, fitness clubs, home improvement and furnishing retailers, and consumer product manufacturers.

Before joining Morningstar, Hottovy was a director and senior stock analyst for Next Generation Equity and an analyst for William Blair & Co., specializing in a wide range of retail and consumer product companies. He also spent two years at Deutsche Bank, covering waste management, water utilities, and equipment rental stocks.

Hottovy holds a bachelor’s degree in finance and a second degree in computer applications from the University of Notre Dame, where he graduated magna cum laude. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of Chicago.

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