McDonald’s (MCD) is one of the biggest brands in the world, and one of the most popular U.S. stocks on Wall Street as a result. MCD is not just the poster child of globalization, with big growth into overseas markets, but also a case study in dividend growth since McDonald’s has increased its dividends seven-fold in the last decade.
But while MCD remains a dominant brand with dominant reach, the growth just isn’t there — and more importantly, the dividends aren’t what they used to be.
Thus, as unthinkable as it might be, you should consider selling McDonald’s stock now.
McDonald’s has underperformed the market significantly thus far in 2013, with MCD stock up only about 8% since January vs. twice that for the S&P 500. That’s a significant warning sign.
Now, I’m not saying McDonald’s is going away. Consider that KFC and Taco Bell parent Yum Brands (YUM), Wendy’s (WEN) and Bugrer King (BKW) combined are still just worth half the market capitalization of MCD!
But there’s more to investing than just size. And after McDonald’s posted a recent miss on both earnings and revenues, it’s increasingly clear that MCD stock has headwinds in the near-term.
McDonald’s continues to bank big on China consumers that haven’t materialized as hoped, and meanwhile struggles amid weak consumer spending and a focus on healthier diets in the U.S. are hitting MCD at home. Throw in soft Europe sales, and it’s not looking good for McDonald’s anywhere.
Throw in the fact that MCD just made a recent dividend increase of 10% — a rather pedestrian uptick in its payout — and is already boasting a 3.2% yield, and it’s unlikely that the brisk pace of McDonald’s dividend growth will continue in the decade ahead as it did in the past 10 years. After all, the dividend payout ratio is now more than 50% of earnings — well above the average for the S&P 500 right now.
I’m not saying MCD will go bankrupt anytime soon and that it’s a horrible long-term buy. There are assuredly lots of reasons to buy McDonald’s stock for the long-haul.
But for the next year or so, it seems that underperformance is going to be the unfortunate reality at McDonald’s … and that the best days of MCD dividend growth are behind us.
That being the case, investors might be better served putting their money elsewhere in the short-term.
Related Reading on MCD Stock
- Details on McDonald’s earnings from July. (CNBC)
- 4 trends that are hurting McDonald’s sales. (InvestorPlace.com)
- On the other side of the trade, Richard Saintvilus says MCD stock is now on the value menu. (The Street)
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.