McDonald’s (MCD) shares reached their lowest prices in a year on Thursday, October 13, 2023, closing at $245.73. This is a 12.63% decline from the company’s 52-week high of $285.60.
There are a number of factors that may have contributed to the decline in McDonald’s share price. One could be the rising cost of food and other commodities. Them being forced to raise prices in order to offset these high costs. Another factor that may be weighing on McDonald’s stock price is the company’s increasing competition from other fast food chains, such as Wendy’s and Burger King. Also, McDonald’s may also be feeling the impact of the overall economic slowdown. As consumers become more cautious about their spending, they may be less likely to dine out at restaurants.
If there is a bright side to a market pullback, it’s that it puts many high-performing stocks on sale. The stocks of many successful businesses are selling off today, along with those that are at higher risk of seeing a sharp earnings slump during a cyclical downturn. It may amuse you that, while MC Donald’s shares may not generate the excitement of a fast-growing tech stock, it typically produces increasing stock price appreciation income and usually outperforms the S&P 500 .
Given its nearly 41,000 restaurants and widespread name recognition, It would be safe to assume that McDonald’s as a restaurant stock is little different from Chipotle or other Restaurant Brands International restaurants like Burger King because McDonald’s owns the buildings run by franchisees and collects rent on the property. It also receives a fee amounting to the percentage of items sold and an initial fee when an entrepreneur launches a new franchise. These activities create a majority of the company’s income. Moreover, they tie its success to a relatively stable real estate market, and the rent payments tend to remain a steady source of income. It also means that the ups and downs of the restaurant industry do not affect McDonald’s as severely.
Consequently, McDonald’s grossed more than $12 billion in revenue during the first half of 2023, 62% of which came from its franchises. Additionally, its $6.08 per share annual payout offers a dividend yield of 2.3%, significantly above the S&P 500’s 1.6% yield. And since the payout has risen yearly since 1976, the rising profit should continue to fund an increasing payout.
Perhaps the best reason to be excited about McDonald’s stock today is that it is available at a sizzling discount. Shares are trading for 24 times earnings right now, down from a P/E ratio of 32 earlier in the year. The fast food giant’s valuation has also hit a 2023 low when it comes to its price-to-sales valuation. That metric recently sank to 8 times sales, compared to 9.5 times sales back in May.
McDonald’s has succeeded primarily because of its business strategy. Its real estate and franchise-focused approach has earned it increased revenue and provided stability in what can be a volatile industry. Yet the business would still likely be pinched by a recession should one develop into 2024.
Overall, the decline in McDonald’s share price is a mixed bag for investors and consumers. Patient investors can look past any rockiness that might harm the short-term earnings picture. But still, before opening a position, investors should learn about the business and how it affects the stock price.