Is McDonald’s stock a buy it now?

The iconic global restaurant chain McDonald’s (MCD -0.33% ) is rebounding strongly after the pandemic hurt sales in 2020. The Golden Arches is booming as consumers seek convenience and affordability, two things it offers in abundance at its nearly 40,000 locations worldwide.

It is understandable that investor interest increases as a company’s operational performance improves. Let’s take a closer look at McDonald’s outlook, dividends and valuation, and consider whether investors should add the stock to their portfolios.

Image source: Getty Images.

Digital options fuel sales growth

Interestingly, McDonald’s revenue in 2021 eclipsed 2019’s level. This is a critical milestone as revenue fell 10% in 2020 when the company was forced to close many of its locations to in-person dinners. Specifically, revenue totaled $23.2 billion in 2021, up from $21.3 billion in 2019. This growth was fueled by the rise of more convenient ordering and fulfillment options.

MCD Revenue Table (Annual)

Data by YCharts.

Digital system-wide sales exceeded $18 billion in 2021 and accounted for more than 25% of total sales in the company’s six major markets. People can now use the McDonald’s app to order and choose their desired fulfillment method (pickup, drive-thru, or delivery). This feature adds another layer of convenience, one of the main reasons people choose McDonald’s, and the $18 billion in digital sales proves just how popular it is. The delivery option, in particular, could boom for several years. It expands the geographic reach of each McDonald’s restaurant and serves consumers who are unwilling or unable to walk or drive to the nearest location.

The increase in digital sales is also helping McDonald’s bottom line. The company only operates 7% of its restaurants, with the rest run by franchisees. Therefore, a gradual increase in sales translates well to the bottom line. It’s also beneficial for franchisees, as one of the biggest challenges of late has been retaining enough staff to keep up with demand. Digital orders can mean fewer cashiers or drive-thru operators, reducing labor costs for restaurateurs.

Diluted EPS MCD Chart (TTM)

Data by YCharts.

This partly explains how McDonald’s posted record earnings per share in 2021. Earnings are a critical component of the company’s ability to pay dividends. Without sufficient profits, dividends cannot be sustained over the long term.

McDonald’s profitability means it can continue to pay and increase its payments as it has done over the years. Since 2012, the Dividend Aristocrat has increased its annual payout from $2.87 to $5.25, extending its nearly five-decade streak of dividend growth.

McDonald’s is trading at fair value

Chart of MCD Price to Free Cash Flow

Data by YCharts.

With a price-to-earnings ratio of 25 and a price-to-free cash flow ratio of around 27, McDonald’s is trading near its five-year average for these metrics. Given McDonald’s excellent long-term outlook, investors can feel content adding McDonald’s stock to their portfolios.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

About Virginia Ahn

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