On May 29, McDonalds (NYSE:MCD) shares fell below $250 for the first time since mid-October 2023. Many restaurant stocks have been under pressure due to concerns about consumer spending and the erosion of pricing power after years of price increases.
THE Dow Jones Industrial Average This component has its challenges, but the stock hasn’t looked this cheap in years and the dividend yield has climbed to an attractive 2.7%. Here’s why McDonald’s stands out as my top Dow Jones dividend stock to buy in June.
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McDonald’s is as stable as it gets
When you compare the fast food industry to restaurants and fast food chains, you probably imagine lower prices and higher volumes with a value proposition focused on price and convenience. But McDonald’s is in a league of its own when it comes to profitability.
The company operates a highly efficient franchise model. As of March 31, McDonald’s had 42,018 restaurants, but only 2,153 – or 5% – were company-owned and operated. McDonald’s owns the land and intellectual property, and receives royalties from its food products and rent. This is a win-win setup for a competent franchisee, who benefits from the McDonald’s brand, supply chain, promotions and much more.
Ultimately, McDonald’s depends on revenue from its franchisees. But in the short term, the franchise model helps reduce risk for McDonald’s because much of its business comes from the overall setup rather than day-to-day operations.
It’s hard to believe, but McDonald’s has a trailing 12-month operating margin of 45.8%, which is higher than Microsoft, Apple, Amazon, Alphabet, MetaplatformsAnd You’re here. That means McDonald’s pockets about 46 cents in operating profit for every dollar of sales. But how?
McDonald’s franchise revenue represents an extremely high margin because its operating expenses are not spent on running these restaurants, but rather on positioning them for success. McDonald’s results for the first quarter of 2024 clearly illustrate this dynamic.
Revenues totaled $6.17 billion. About $2.36 billion came from company-owned and operated restaurants, and $3.72 billion came from franchised restaurants. Spending at company-owned and operated restaurants was $2.04 billion, meaning the margin on those company stores was 13.6%. But franchise restaurant occupancy expenses were only $627 million. Total operating costs and expenses were $3.43 billion, leaving $2.74 billion in operating profit for a whopping 44.4% quarterly operating margin.
Understanding how McDonald’s makes money makes the company much smaller than it appears at first glance. For example, McDonald’s franchise sales were $28.8 billion in the first quarter of 2024. But franchise sales are not recorded as revenue by the company. Its actual revenue from franchises was, as mentioned, just $3.7 billion, which again comes from licensing, royalties, rent, etc.
Franchisees buy McDonald’s over the alternatives because it’s a good way to make money over several years or even decades. A few quarters of slowing growth do not dissuade this proposal.
McDonald’s Stock Is Great Value Right Now
McDonald’s business model generates constant capital flows and is resistant to recessions. So naturally, the stock benefits from a premium valuation. In fact, its three-, five-, seven-, and 10-year median price-to-earnings (P/E) ratios are all above 25. However, the stock is currently only at 21.8 P/E. McDonald’s stock is down more than 13% year to date, which has made the valuation more attractive.
MCD PE ratio data by YCharts
The earnings multiple is not an accounting accident. Analyst consensus estimates call for earnings per share (EPS) of $11.29 for 2024 and EPS of $12.30 for 2025. Projections indicate earnings growth, not decline, making McDonald’s a excellent value for investors willing to buy on the dip.
Besides its strong brand and inexpensive valuation, McDonald’s dividend provides another incentive to hold the stock for the long term. McDonald’s has increased its dividend every year for 47 consecutive years. The most recent increase, announced in October, increased the dividend 10% to $6.68 per year, equating to a forward yield of 2.7%.
McDonald’s track record of consistent and large dividend increases, coupled with a solid yield, makes it an excellent source of passive income generation.
A hassle-free purchase
McDonald’s is one of the most well-run and recession-resistant companies. But its benefits are well known, making purchasing opportunities difficult to find. The current selloff in McDonald’s stock is primarily due to concerns about its pricing power. There are only so many price increases a company can impose before consumers stop seeing it as good value.
Much of McDonald’s first-quarter 2024 earnings call focused on pricing and creating value through meal plans and digital offerings. Price is everything at McDonald’s. For its franchisees to thrive, customers must view McDonald’s as a fast food option that offers convenience and price.
Given the numerous price increases in recent years, McDonald’s is certainly facing a difficult period in the short term. But the long-term investment thesis, valuation and dividends are simply too good to ignore. Investors looking for a stable stock to add to their portfolio should consider McDonald’s as an attractive blue-chip dividend stock to buy on a dip.
Should you invest $1,000 in McDonald’s right now?
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft and Tesla. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
