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Topic: Blue Chip Stocks

Profit jumps 18.4% for this fast-food leader

A refranchising plan is set to cut $500 million annually from this fast-food giant’s operating costs starting this year. The company also continues to invest in key upgrades for its locations such as modern seating areas, digital self-order kiosks and table service.

 This industry leader has also boosted earnings by offering home delivery and expanding its menu to include more healthful items. The changes add to its solid growth prospects and to the appeal of its solid dividend.


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 MCDONALD’S CORP. $180 (New York symbol MCD; www.mcdonalds.com) is the world’s largest operator of fast-food restaurants, with 37,557 outlets in 120 countries. It serves a wide variety of food but is best known for its hamburgers and french fries.

The company has raised its dividend each year since 1976. Starting with the December 2018 payment, McDonald’s increased its quarterly dividend by 14.9%, to $1.16 a share from $1.01. The new annual rate of $4.64 yields 2.6%.

Sales fell 23.4%, from $27.4 billion in 2014 to $21.0 billion in 2018. That’s because McDonald’s continues to sell company-owned stores to franchisees; the goal is to have them operate 95% of its restaurants, up from today’s 93%.

Overall earnings also declined 4.8%, from $4.8 billion in 2014 to $4.5 billion in 2015. McDonald’s is an active buyer of its own shares, so per-share earnings fell at a slower rate of 0.4%, from $4.82 to $4.80.

Earnings then improved to $5.44 a share (or a total of $4.7 billion) in 2016, before rising again to $6.37 a share (or $5.2 billion) in 2017. In 2018, earnings jumped 18.4%, to $7.54 a share (or a total of $5.9 billion).

The higher earnings are partly because the refranchising plan has lowered the company’s operating expenses, and freed it from maintaining and upgrading these outlets. McDonald’s also recently sold 80% of its 2,700-location restaurant chain in China to a group led by a state-owned firm for an $850 million gain.

The company spent $2.7 billion in 2018 on restaurants and upgrades, slightly higher than its initial forecast. That’s because it opened 4,500 of its “Experience of the Future” stores in the U.S., well ahead of its original goal of 4,000.

In 2019, McDonald’s expects to spend $2.3 billion, with $1 billion dedicated to finishing 2,000 more stores in the U.S. Key improvements will include modern seating areas, digital self-order kiosks and table service.

Blue Chip Stocks: Home delivery customers boost growth by spending more per order

The company also aims to spur its growth with home delivery. On average, those McDonald’s customers spend more per order than walk-in guests.

So far, over 19,000 of the company’s outlets— more than half its worldwide total—now offer delivery. Revenues from delivery account for more than $3 billion annually or 14% of overall sales.

In fact, a key part of the company’s recent success is its ability to adjust its menu, particularly as consumers shift toward more healthful foods.

As part of that plan, McDonald’s now uses fresh beef for its Quarter Pounder and other premium burgers. That replaces frozen patties.

A new plan to cut management layers at its U.S. operations should also make it easier for McDonald’s to respond to changing consumer tastes. This plan, along with a previously announced restructuring, will help cut $500 million from its annual expenses by the end of 2019.

The company’s sound balance sheet will let it continue to improve its operations. Its long-term debt of $31.1 billion (as of December 31, 2018) is a moderate 22% of its market cap. It also held cash of $866.0 million.

The stock trades at 22.1 times McDonald’s projected 2019 earnings of $8.15 a share. That’s a reasonable multiple in light of the company’s strong growth prospects and well-known brands.

Recommendation in Wall Street Stock Forecaster: McDonald’s is a buy.

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