1 Dividend Aristocrat That Could Surprise Wall Street to the Upside

McDonald's Corporation (MCD), the fast-food giant and longtime Dividend Aristocrat, has long been a go-to for investors looking for steady returns and growth. However, McDonald's reported a couple of rough quarters recently, with global comparable sales decreasing 1.0% in Q2 2024, reflecting negative comparable sales across all segments. 

Despite these challenges, there are signs of improvement on the horizon. Recent analysis from Evercore suggests that McDonald's same-store sales growth in Q3 could top estimates, based on improving traffic trends. This potential turnaround is largely attributed to the company's focus on value promotions and the introduction of collector's meals, which have helped create buzz and drive foot traffic to restaurants.

With the fast-food market expected to reach $316.11 billion by the end of 2024 and grow at a CAGR of 4.45% from 2024 to 2032, McDonald's is well-positioned to capitalize on this trend. As the company continue to demonstrate resilience and prioritize value, can it surprise Wall Street to the upside and reaffirm its status as a standout long-term investment? Let's dive into the factors that might drive McDonald's to exceed expectations in the quick-service restaurant industry.

McDonald's Financial Resilience

McDonald's (MCD), the world's largest restaurant chain, thrives thanks to its strong franchise model. With over 95% of its locations run by franchisees, the company pulls in revenue through royalties, rent, and franchise fees, ensuring a steady income while keeping operational costs low.

The fast-food giant has faced challenges, including inflationary pressures and a slowdown in consumer spending, which have negatively impacted its market performance. MCD stock has underperformed, with a slight dip of 1.4% year-to-date. However, the stock's rebound off its lows - up 8.5% in the past month and 14.9% over the last three months - shows strong investor confidence in MCD's more recent results.

McDonald's knack for adapting to consumer preferences has helped it weather economic challenges and stay at the forefront of the quick-service restaurant industry. In Q2 2024, McDonald's reported nearly $6.5 billion in consolidated revenues, marking a 1% increase in constant currencies. Despite a 1% decrease in global comparable sales, the company maintained stable revenues, showcasing its resilience in handling market fluctuations. 

However, operating income decreased by 6% due to impairment and restructuring charges, with diluted earnings per share falling to $2.80. The company's earnings were impacted by inflation and restructuring charges, but there are positive signs from its value meal promotions, which have been extended due to strong customer response.

On the valuation front, McDonald's is priced at 24.57 times forward earnings, which is a slight discount to its own historical averages. Its market presence is firmly in mega-cap territory, worth about $209.1 billion.

The Strategies Behind McDonald's Success

McDonald's is always looking for new ways to innovate and grow, without changing its core menu classics - and its strategic partnerships are a big part of that. One of the most exciting moves is teaming up with Krispy Kreme(DNUT), which means you'll be able to grab your favorite doughnuts at McDonald's across the country by the end of 2026. This partnership not only adds some variety to McDonald's menu, but also taps into Krispy Kreme's loyal fan base, which could bring in more customers and boost sales.

When it comes to technology, McDonald's is stepping up its game by expanding its partnership with Accenture(ACN). They're diving into cutting-edge tech and artificial intelligence (AI) solutions to make things run smoother and give customers a better experience. Plus, they're helping employees learn the digital skills they need to keep up with the times. These upgrades should streamline operations, cut down on disruptions, and make the whole business more flexible.

And of course, McDonald's is still going strong when it comes to rewarding shareholders. They just announced a quarterly dividend of $1.67 per share, which shows they're committed to consistent dividend growth over the long haul. With an annual dividend yield of 2.29%, backed by over 40 years of growth, McDonald's solid dividend policy proves they're financially stable and dedicated to giving back to investors.

Why Wall Street Might Be Underestimating McDonald's

McDonald's has big plans for the future, setting ambitious targets for growth and expansion. The company wants to have 50,000 restaurants worldwide by 2027, focusing on speeding up new restaurant development. This aggressive expansion plan, along with McDonald's commitment to integrating technology and forming strategic partnerships sets the stage for continued success in the coming years.

Moreover, McDonald's knows how important customer loyalty is for long-term growth. The company aims to grow its loyalty program from 150 million to 250 million active users by 2027, using data from its mobile app to create personalized experiences and build stronger customer relationships.

Currently, 31 analysts are tracking McDonald's stock, with a consensus rating of "moderate buy." This includes 16 “strong buy” recommendations, 2 “moderate buys,” and 13 “holds,” showing a generally positive outlook on the company's future performance - though slightly less bullish than three months ago.

While some analysts, like TD Cowen, have recently downgraded the stock from “buy” to “hold,” the stock's rebound from its lows and early indications of strengthening store traffic suggest that MCD might be bouncing back from challenges faster than expected. 

Meanwhile, the average price target of $299.76 is just 2.5% overhead. The Street-high target is $360, indicating a 23% potential upside. 

Conclusion

McDonald's faces some challenges, but it's not much the legacy chain hasn't seen before. The company's clever promotions and focus on value, along with its consistent dividend payments, make MCD a solid all-weather investment. Although the stock has had its ups and downs, MCD's long-term performance and prospects look as promising as ever.