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Investors Should Stop Feasting on McDonald’s Stock

Will Healy

McDonald’s (NYSE:MCD) has seen its stock surge to record highs. MCD stock has rocketed higher since its Oct. 23 earnings announcement. The earnings and revenue beat started an uptrend that has taken McDonald’s stock higher by over 10% within a two-week period.

The company has also remodeled its U.S. franchises and embarked on an expansion plan in China despite its already massive footprint.

However, with the recent increase in the stock price, investors may begin to question how much further MCD stock will move higher in the near term. Given its higher valuation and other factors, investors might serve themselves better by not biting into MCD at this time.

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McDonald’s Stock and Expansion

Stockholders have feasted on increasing amounts of MCD stock as it beat peers such as YUM! Brands (NYSE:YUM), Restaurant Brands International (NYSE:QSR), Wendy’s (NASDAQ:WEN), and Jack In The Box (NASDAQ:JACK) on same-store sales increases.

Not only does it beat its peers in growth, but MCDonald’s also performs well on the dividend front. The current annual dividend for McDonald’s stock stands at $4.64 per share. This amounts to a yield of just over 2.5%. Although this does not exceed QSR’s yield of nearly 3.15%, it outperforms all other restaurant peers on dividend increases.

As of this year, MCD has hiked its payout annually for 41 consecutive years.

The company has also improved its image at home and abroad. It has worked to modernize about 1,000 locations per quarter. McDonald’s has also transitioned more of its food to fresh ingredients, and it has added delivery options.

Outside the U.S., McDonald’s plans to open more than 2,000 additional locations in China over the next five years. It has already established more than 37,600 locations in 120 countries, 93% of which serve as franchise locations. Such a footprint creates concerns about where MCD will find new growth. For now, China has become that answer.

MCD Stock Outpaced Growth

With these improvements, Wall Street has taken notice of McDonald’s stock. Current earnings estimates take its price-to-earnings (PE) ratio to about 23.8. This brings the company’s multiple near S&P 500 averages. It also exceeds its own five-year average of 22.5.

For this reason, I am going to urge investors to hit the pause button. The stock has risen over 25% in the previous eight months. That comes in ahead of the 16.4% growth rate expected for McDonald’s this year. After this year, analysts forecast 6.2% increase in profits for 2019 and for growth to average 9.3% per year for the next five years.

Most investors would consider this a healthy growth rate for a $142 billion company. Still, a PE of 24 seems high for a company not growing in the double-digits. Given the growth and the rising dividend, I would not encourage longer-term investors to sell. However, I would not open or add to positions at this price either.

The Bottom Line on McDonald’s Stock

Although McDonald’s has implemented strategies to remain competitive at home and expand abroad, new buyers should probably avoid nibbling on MCD stock at this time.

Without question, McDonald’s remains the most influential company in its segment of the restaurant industry. Moves to update its stores at home and expand further abroad will reinforce this dominance.

However, with the PE ratio approaching 24, this stock does not come cheap. Also, with growth likely to remain in the single-digits in future years, investors may not want to pay that multiple longer-term.

I believe MCD will maintain steady growth and continue its long track record of dividend increases. For this reason, I encourage long-term stockholders to stay put. For everyone else, those looking for a McDonald’s fix should buy Big Macs and fries instead of MCD stock.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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