3 Reasons McDonald's Stock Could Hit New All-Time Highs
McDonald's (NYSE: MCD) is enjoying robust growth. The restaurant chain's global comparable sales rose 4.2% in the third quarter, with comps rising in all of its major business segments. Better still, McDonald's is gaining share in a fiercely competitive industry; its third-quarter comp sales growth topped the roughly 3.5% gains of the industry overall. Investors cheered these results, and McDonald's stock soared to record levels.
However, rather than simply rest on its laurels, McDonald's is spending heavily to modernize its stores. Along with its franchisees, the company is rolling out delivery, enhanced digital ordering capabilities, and its "Experience of the Future" restaurant concept across its global store base.
Here's why these initiatives can help to drive McDonald's stock price higher in the years ahead.
Image source: Getty Images.
Delivering growth
McDonald's global retail footprint gives it a powerful edge in terms of delivery. "With over 37,000 restaurants, we have a massive global footprint, which provides a distinct advantage by placing us closer to more customers than any of our competitors," CEO Steve Easterbrook said during the company's Q3 earnings call.
McDonald's is partnering with Uber Eats to rapidly roll out this service to its restaurants. Delivery is now available at more than 15,000 McDonald's locations, and the company plans to add this capability to thousands more of its stores by the end of 2018. Delivery is boosting customer satisfaction scores and reorder rates, and it now accounts for as much as 10% of sales in several top international markets for McDonald's.
McDonald's believes it can enjoy similar success with delivery in the U.S., where the restaurant chain, like many retailers, is battling tepid traffic trends as retail transactions increasingly migrate to online channels. Delivery can help to offset these trends and provide a powerful new growth driver for McDonald's in the process.
A new digital experience
McDonald's is also strengthening its digital ordering and payment technology. Features such as mobile order and pay should help the restaurant chain better serve tech-savvy customers. And by integrating its mobile app into new service options such as curbside pickup, McDonald's is adding an additional level of speed and convenience to its operations that could help further boost sales.
Moreover, McDonald's delivery and mobile initiatives complement its new Experience of the Future restaurant design concept. EOTF includes store upgrades such as self-ordering kiosks, modern decor, and an improved drive-thru experience. All of which should make the chain's restaurants more appealing to both in-store diners and on-the-go customers.
The kiosks may have the biggest impact. By reducing the number of employees needed to run its restaurants, McDonald's and its franchisees will be less exposed to wage inflation. And by reducing the impact of rising labor costs, EOTF should help to improve the profitability of McDonald's restaurants going forward.
Higher profits = higher dividends
Even as it invests in these growth projects, McDonald's is able to reward investors with bountiful capital returns thanks to its tremendous cash flow production. The company generated nearly $1.8 billion in free cash flow in the third quarter alone. That allowed it to return $1.7 billion to shareholders via dividends and share repurchases last quarter.
Better still, McDonald's is boosting its quarterly cash dividend by 15%, to $1.16 per share, beginning in the fourth quarter. This marks the 42nd consecutive year that McDonald's has increased its annual dividend. And with its growth projects likely to fuel further increases in earnings per share -- analysts expect McDonald's EPS to rise by nearly 10% annually over the next half-decade -- investors can expect more dividend raises in the coming years.
All told, with its powerful competitive advantages, intriguing growth prospects, and steadily rising dividend, McDonald's stock is likely to enjoy strong demand among investors. And as its profits and dividends grow, the restaurant titan's stock could continue to set new all-time highs in the years ahead.
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Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
