McDonald’s Stock Sizzles, but Will it Hit a New All-Time High?

Key Points

• McDonald's stock has rocketed higher following its Q3 report. 
• The outlook is good despite a growing FX-related headwind. 
• The dividend is safe and just increased by 10%. 

Shares of McDonald’s Corporation (NYSE: MCD) sizzle in the wake of its Q3 earnings report. It looks like shares could set a new all-time high very soon. The combination of business strength, dividend health, dividend growth and sell-side support have rocketed the company higher but also fire a strong technical signal as well. Taken at face value, it seems like a no-brainer for income investors to buy into a best-in-breed stock at a time like this, but there are still risks ahead.

McDonald's stock and the company in general have experienced strength now but it may not last because upside potential could be limited. Not only is the FX headwind expected to strengthen over the coming year, but rising inflation and interest rates are still the backdrop upon which the economy operates. 

McDonald’s Rises on Impressive Quarter 

McDonald’s had a great quarter supported by gains in all segments. The only truly bad news is that a 700 basis point FX headwind sapped growth and resulted in a decline in revenue versus last year. The $5.87 billion in revenue has dipped 5.3% versus last year but beat the Marketbeat.com consensus figure by $0.170 billion, or nearly 300 basis points, so the bad news wasn’t as bad as expected and strength carried through to the bottom line as well. On a segment basis, all segments posted growth with the U.S. up 6.5%, international up 8.5% and international developing markets up a much stronger 16.7%. On a comp basis, global comps were up 9.5% on an FX-neutral basis and beat the consensus by 5.8% as well. 

Moving down the report, the FX headwind cut into earnings and resulted in a decline in gross and operating margins. Operating margins contracted by 4% compared to the larger 5.3% contraction in revenue and led to strength on the bottom line and a larger-than-expected dividend increase. The Q3-adjusted EPS of $2.68 is down only 2.9% from last year but beat the consensus estimate by more than a dime, or 430 basis points. McDonald’s earnings power is very strong in the current environment. Price increases and brand loyalty take the day and shareholders benefit from it. 

McDonald’s Raises its Dividend, Analysts Buy it  

McDonald’s is a well-known dividend grower and on track to become a Dividend King but it was still able to surprise the market with its latest distribution increase. The company raised the payout by 10% compared to the five-year CAGR of 8%, the expected figure. The new payout is worth $1.52 in quarterly payments which annualizes to 2.3% with shares trading at $265. The 26 analysts tracking the stock have it pegged as a "moderate buy" with a price target of $283. The $283 target has held steady over the past few quarters but may start moving higher now. The post-release activity shows five commentaries so far, four with price target increases and one with a reduction that has the stock trading above the broader consensus. 

The Technical Outlook: McDonald’s is at a Key Juncture 

The price action in McDonald’s is bullish. It could set a new high and it may fire a very strong signal but it hasn’t done that yet. Until then, resistance is possible at the all-time high and it may keep the stock from breaking out. If this comes to pass, McDonald's stock price may remain range-bound at current levels until more news comes out. If the stock is able to break resistance, it could keep rising and move up to the consensus figure for a gain of 7% or so and set a new all-time high.