Shares of McDonald’s (NYSE: MCD) are sizzling in the wake of its Q3 earnings report and it looks like the shares could set a new all-time high very soon. The combination of business strength, dividend health, dividend growth, and sell-side support have it not only rocketing higher but set to fire a strong technical signal as well. Taken at face value it seems like a no-brainer for income investors, buying into a best-in-breed stock at a time like this, but there are still risks ahead. McDonald’s is experiencing strength now but it may not last and 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 backdrops upon which the economy is operating.
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 is down 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 was expected and strength carried through to the bottom line as well. On a segment basis, all segments posted growth with the US 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 as well and results in a decline in gross and operating margins. The takeaway is that operating margins contracted by 4.0% 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. The takeaway is that McDonald’s earnings power is very strong in the current environment, price increases and brand loyalty are taking the day, and shareholders are benefiting from it.
McDonald’s Raises Its Dividend, Analysts Buy It
McDonald’s is a well-known dividend grower and one that is on track to become a Dividend Aristocrat but it was still able to surprise the market with its latest distribution increase. The company raised the payout by 10% compared to the 5-year CAGR of 8% which was the expected figure. The new payout is worth $1.52 in quarterly payments which annualizes to 2.3% with shares trading at $265 and the analysts are buying it. The 26 analysts tracking the stock have it pegged at a Moderate Buy with a price target of $283. The $283 target has been holding steady over the past few quarters but may start moving higher now. The post-release activity shows 5 commentaries so far, 4 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, shares of MCD may remain range bound at their current levels until more news comes out. If not, 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. 
