Is This Unstoppable Dividend Stock a Buy?

There are no be-all and end-all metrics to measure the quality of a dividend-paying company. But one stands out above the rest: The number of consecutive years that a business has managed to grow its dividend.

Businesses with decades of dividend growth to their credit are almost guaranteed to be of world-class quality. With 46 years of dividend growth under its belt, McDonald's (NYSE: MCD) is one of the best businesses on the planet beyond a doubt. This raises the following question: Should dividend growth investors buy the stock now? Let's explore McDonald's fundamentals and valuation to find out.

McDonald's dishes out results that shareholders should love

McDonald's is synonymous with the quick-serve restaurant concept. That's because with over 40,000 (95% franchised) restaurants throughout the world, McDonald's stands above everyone else as the leader of its industry. The company's $211 billion market capitalization makes it bigger than the next two biggest publicly traded competitors combined.

Q1 2023 Global Comparable Sales Growth Rate Q1 2022 Global Comparable Sales Growth Rate
12.6% 11.8%

Data source: McDonald's Q1 2023 earnings press release and McDonald's Q1 2022 earnings press release.

The Chicago-based fast-food chain recorded $5.9 billion in revenue for the first quarter ended March 31, which was up 4.1% over the year-ago period. At first glance, this top-line growth seems modest. But McDonald's global presence during a time when the U.S. dollar was exceptionally strong weighed on revenue to the tune of 4% in the quarter. Thus, the company grew its constant currency revenue by a healthy 8% clip during the quarter.

McDonald's impressive top-line growth was mostly driven by its rewards program. The company's MyMcDonald's rewards program boasted nearly 50 million 90-day active members across its top six markets as of March 31. This is significant to mention because McDonald's has observed that rewards customers are more likely to visit more frequently and spend more money than non-rewards customers.

Q1 2023 Net Margin Q1 2022 Net Margin
32.8% 30.1%

Data source: McDonald's Q1 2023 earnings press release.

The company's non-GAAP (adjusted) diluted earnings per share (EPS) surged 15% higher year over year to $2.63 for Q1. Excluding unfavorable foreign currency translation, the growth rate was even more robust at 19%. McDonald's disciplined cost management helped total operating expenses remain relatively flat in the quarter. This is how the company's non-GAAP net margin expanded by approximately 270 basis points during Q1. Coupled with a reduction in McDonald's outstanding share count from share repurchases, this is why adjusted diluted EPS rose at a much faster pace than revenue for the quarter.

As McDonald's expands its rewards program to more markets, the company should continue to grow moving forward. This explains why analysts anticipate that McDonald's adjusted diluted EPS will compound by 7.8% annually over the next five years.

Customers waiting in line at a fast food restaurant.

Image source: Getty Images.

A generous yet manageable payout

Compared to the S&P 500 index's 1.7% dividend yield, McDonald's 2.1% dividend yield could be capable of satisfying the appetite of income investors. The company's potential for vigorous payout growth acts as the icing on the cake for dividend growth investors.

McDonald's dividend payout ratio is positioned to clock in at approximately 56% in 2023. This should leave the company with enough capital to open more restaurants and build on its rewards program in the future. That's why I would be surprised if McDonald's served up any less than high-single-digit to low-double-digit annual dividend growth over the medium term.

The stock's valuation is still buyable

Up roughly 20% in the past 12 months, shares of McDonald's have meaningfully outperformed the broader market. This is probably because with a recession possibly on the way, investors see the company as a safe haven due to the affordability of its menu.

McDonald's stock appears to be reasonably valued, even with the recent run-up. The stock's forward price-to-earnings (P/E) ratio of 24.8 is just below the restaurant industry average forward P/E ratio of 25.

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Kody Kester has positions in McDonald's. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.