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McDonald's - dividend up 10% in line with underlying sales growth

Total revenues in the third quarter fell 5% to $5.8bn in part held back by restaurant closures in the Ukraine and Russia.

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Total revenues in the third quarter fell 5% to $5.8bn in part held back by restaurant closures in the Ukraine and Russia.

On a like for like basis revenue was up 9.5%, beating market expectations. In the US, growth of 6.1% was largely driven by menu price hikes. International Operated Markets saw growth of 8.5%, with territories where McDonald's operates a licensing model up 16.7%.

Sales for the total network (including franchisees and owned restaurants) were up 6%, and the Group highlighted that in its 6 major markets over a third of sales were made using a digital device.

Operating income was down 7% to $1.98bn. McDonald's expects inflation related margin pressure to persist for several quarters to come.

McDonald's raised its dividend for the quarter by 10% to $1.52 per share.

Excluding Russia, the Group expects full year underlying operating margins in the mid-40s, with over 1,300 net new openings giving network sales a boost of around 1.5% in 2022.

The shares were up 3% in late morning trading.

View the latest McDonald's share price and how to deal

Our View

Continuing underlying sales momentum allowed third quarter earnings to surprise to the upside. Inflation continues to weigh on profits and the Group expects that to persist for ''several quarters to come''. It's also expecting a mild to moderate recession in the US, with a deeper one in Europe.

There'll be challenges ahead but McDonald's has seen this before and outshone the competition during the financial crisis, whilst managing to maintain earnings growth. That could be more challenging this time round with high inflation coming into the picture.

The groups' largely franchised model is an efficient operation, with McDonald's off the hook for many of the typical restaurant running costs. Cash conversion in excess of 90% means the vast majority of profits feeds into cash for the business to either spend or return to shareholders.

Operating cash flow expectations for the year have trended downwards but are still not far from $8bn. That has helped prop up the increased spending to expand and revitalise stores, whilst continuing to improve the digital presence.

Some of that spend will be funnelled into revamping existing McDonald's sites and pushing the 'Accelerating the Arches' strategy. Truth be told the strategy's more of a refresher, than a new direction, but the doubling down of efforts in digital and delivery are positive.

It's not all happy meals and smiles, though. While results show the group's moving swiftly on from the pandemic, the ordeal isn't firmly in the rear-view mirror just yet. Lockdowns in China have tapered the Group's new openings programme in the People's Republic.

Underlying operating margins have been robust so far but the Group notes inflationary pressure on staff costs and commodities. The franchised model means its somewhat shielded from the full impact of this.

McDonald's is also lugging around a hefty debt pile. At the end of last year net debt including leases was $43.9bn, or 3.7 times expected cash profits for this year. The group enjoys strong cash generation but given recent increases in interest rates we think debt reduction should be a priority.

The fast food chain's convenience transformation is thriving, with improvements in the online service, delivery and drive thru. And the group's well positioned to continue pushing that initiative despite uncertainty ahead. Markets share the optimism though, and the group trades a little way above its long term average price/earnings ratio.

McDonald's key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 27th October 2022