Reversal is fresh opportunity to buy this global chain
It’s throwing ethical caution to the wind, but analyst Rodney Hobson expects investors will keep buying this stock with a long history of outperformance.
15th January 2025 07:58
by Rodney Hobson from interactive investor
Has ethical investing passed its peak? Was it just a fad? Just when the world is watching icepacks melting and California burning, the desire to “do the right thing” seems to be on the wane.
Only three years ago there was relentless pressure on companies to adopt policies on sustainability, diversity and other ethical issues. The supply chain had to be kept squeaky clean. Failure to do so would encourage customers and investors to look elsewhere.
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Something has changed radically. The heavy numbers that turned up for the annual London Sustainable and Social Investing Show have dwindled and the event has been rolled into the larger London Investor Show. Companies have likewise cut back on paying even lip service to issues such as sustainability and social diversity.
That change in mood is likely to accelerate in the United States once Donald Trump, a man not known for his woke agenda, resumes as President next Monday. Recent rulings by the US Supreme Court with its conservative majority have thrown doubt over the legality of what is sometimes referred to as positive discrimination.
The latest American company to throw ethical caution to the wind is restaurant chain McDonald's Corp (NYSE:MCD),which has scrapped the diversity initiatives it introduced under pressure from activists, rescinding such measures after attacks from different agitators. McDonald’s will no longer set “aspirational representative goals” worldwide, nor will it continue to require its suppliers to make a commitment on diversity, equity and inclusion.
The chain says that it remains committed to inclusion but these are, more than ever, just words. An activist investor called Robby Starbuck has made it his mission to attack what he perceives as woke companies, claiming that cash-strapped customers now have different priorities.
The shift in the mood has also produced similar changes in policy at retailer Walmart Inc (NYSE:WMT)and motorcycle maker Harley-Davidson Inc (NYSE:HOG). Walmart has suffered noadverse impact on its share price; indeed, it has gained from $55 to $90 over the past 12 months. Harley on the other hand has slipped from $34 to $27 in that time.
Among tech stocks, Meta Platforms Inc Class A (NASDAQ:META)and Amazon.com Inc (NASDAQ:AMZN)have both decided to roll back their diversity programmes, while Apple Inc (NASDAQ:AAPL)is urging shareholders to reject such a move.
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The overall impact is likely to be that companies are judged solely on their financial record, rather than having pariah stocks such as oil and tobacco seeing their shares trade at a discount because they are shunned by ethical investors.
Back to McDonald’s. Its shares dropped 2% in one afternoon when an outbreak of e.coli was linked to its quarter pounder burgers in October. There were 75 reported cases in 13 western US states, including one death and more than 20 people being admitted to hospital. Lawyers were, as usual in the US, quick to leap on the litigation bandwagon.
Source: interactive investor. Past performance is not a guide to future performance.
No sooner had normal service been resumed than McDonald’s produced third-quarter figures showing net profit down 3% to $2.26 billion despite a small rise in revenue to $6.9 billion. A 6% rise in costs was to blame for the profits shortfall. Undaunted, the fast-food chain raised the quarterly cash dividend by 6% to $1.77 per share.
The stock has slipped from a peak of $318 in mid-October to $280, where the price/earnings (PE) ratio is factoring in better news at just under 25 while the yield is 2.4%.
Hobson’s choice: McDonald’s shares have remained above my initial buy recommendation at $244, and my later suggestion that $300 was attainable took a little longer than I expected but eventually happened. The latest slippage in the share price restores the buy rating.
Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.
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