McDonald’s: Perception vs. Reality (MCD)

For most investors, McDonald's Corporation (MCD) is seen as a mature company that generates significant cash flow, pays a generous dividend, and is resilient to bear markets. All of this is true, but there is a bigger underlying picture.

MCD has appreciated 4.21% over the past 12 months, which puts it relatively on pace with the S&P 500’s gain of 4.57% over the same time frame. However, MCD currently offers a dividend yield of 3.12 whereas the S&P 500 currently yields 2.01%. MCD has become a no-worry stock, meaning that while upside potential might be limited, there is a floor. This might remain the case, especially with McDonald’s cutting costs and improving customer service by adding self-order kiosks. In most cases, self-order kiosks would weaken customer service, but this is widely viewed as an improvement at McDonald’s.

The longer-term danger for McDonald’s is the negative consumer perception of the brand. Consider the following information. Prior to 2000, consumers ate at McDonald’s without much concern. They knew it wasn’t the healthiest option in town, but no big deal. Then, in 2004, Super Size Me crushed the belief that eating at McDonald’s was no big deal. This was followed up by McLibel: Two Worlds Collide in the United Kingdom in 2005. Though not related directly to McDonald’s, Food, Inc. was released in 2008, which didn’t help.

Notice that all of the above films were released in the 21st century, a time when the health-conscious consumer is rising and passing on fast food for healthier alternatives. 

McDonald’s had a rough stretch in the early 2000s. It recovered in the mid-2000s, was hit in 2008 with almost every other stock throughout the broader market, and then began its tear higher in 2009. The difference between now and the early 2000s are twofold: the rise of the health-conscious consumer and significantly increased competition such as sandwich shops, the popularity of fast-casual, and the relentless rise of Shake Shack. 

If perception is everything in the investment world, then McDonald’s is safe for now because its perceived as strong-cash-flow company that returns capital to shareholders while also offering resiliency. This may continue, but in the real world, McDonald’s is facing strong headwinds related to food quality and increased competition. Unless McDonald's can change its image, it might only be a matter of time before the stock catches up to reality. 

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