McDonald's Remains a Premium Defensive Play Despite McPlant Hiccup

·3 min read

McDonald's (NYSE:MCD) recently tested its McPlant burger in some restaurants. However, the test did not produce the desired results, as customers showed little interest in the product.

Vegetable-based meat alternatives are a new craze that is growing in popularity. These products are made from vegetable proteins and often contain little or no animal products. They often claim they are more environmentally friendly and healthier than traditional meat products. Companies like McDonald's benefit when these products succeed because they can diversify their revenues through appealing to more customers.

In February this year, McDonald's tested its new product in roughly 600 locations. The results were underwhelming, and the company is now going for a course correction.

It is not surprising that McDonald's had difficulties with the McPlant burger. After all, it was looking to tap into a new market. But considering this corporation's size, the fast food giant can easily overcome this hiccup.

While McDonald's had hoped that the McPlant would be a hit with vegetarians and vegans, it seems that the burger failed to win over this group. In addition, meat-eaters were unimpressed with the taste and texture of the plant-based patty. As a result, McDonald's has decided to scrap its plans for a nationwide rollout of the McPlant. While the burger may have had some limited upside, it appears McDonald's will need to go back to the drawing board to create a successful plant-based product.

It's disappointing that such a high-profile product has failed. However, the news comes just weeks after McDonald's reported stellar earnings, reaffirming its worth as a defensive play in the current environment.

Despite McDonald's menu prices being 8% higher than last year, the fast food giant saw a 3.5% increase in sales in the first quarter of 2022 versus the same period last year. This speaks to McDonald's strong brand and appeals to budget-conscious consumers, among other factors.

McDonald's second-quarter earnings topped estimates, proving its mettle when most companies find it tough to navigate supply chain issues and increase costs. However, revenue did not live up to expectations.

While net sales for the company fell by 3% during the past quarter, McDonald's still had a successful quarter with its international customer base. The company recently closed franchises in Russia and Ukraine due to the ongoing war in the region, but elsewhere, same-store sales are on the rise, increasing by 9.7% in the last quarter.

Commenting on the results, CEO Chris Kempczinski said the environment is still "challenging" as inflation remains high. The price of food and packaging at McDonald's is on the rise. In a recent earnings call, executives said that U.S.-based inflation would likely continue to increase into the next quarter before slowing down towards its end-of-year period. For the whole year, McDonalds predicts it'll have 12% to 14% inflation in food and produce costs in the U.S. and even higher levels in Europe.

Investors may feel slightly anxious about McDonald's future as the company is not immune to challenges. However, they will be able to worry less because of its excellent dividend payments and long history of increasing them every year since 1976, when it first paid out dividends. It is just four years away from 50 consecutive years of dividend increases.

McDonald's is an excellent investment during inflationary times, in my opinion, because it is a cheap but tasty restaurant option. The company has a long history of increasing prices in line with inflation, so shareholders can expect dividends to remain secure. McDonald's also has a strong track record of profit growth, which means it is well-positioned to weather an economic downturn. Finally, the company's share price is relatively insensitive to changes in interest rates, making it a relatively safe investment during periods of volatility.

This article first appeared on GuruFocus.