MCD is undervalued for long-term dividend investors due to low PE and high yield, but unsuitable for market outperformance given slowing growth.

But to begin with, I want to start with McDonald's. Their stock is down 4.81% and has lost 21% in the past year. Excluding yesterday's intraday fluctuations , the stock is now at a 52-week low.

And if we look at 5 years, McDonald's stock has fallen 3% in the last 5 years. So, is this recent price drop a buying opportunity? Let's look into this matter.

McDonald's has a long history of paying dividends. They are a Dividend Aristocrat , who have been consistently increasing their dividends for over 25 years.

They used to pay quarterly dividends, later they became annual dividend payers. They are back to being quarterly dividend payers. And they have been continuously increasing dividends ever since.

Here you can see that they have increased their dividend by 105% in the last 10 years. This is a compound annual growth rate of 7.46%. However, this rate is now slowing down. In the last 3 years , dividends have only increased by 15%. And it's giving you a CAGR of 4.94%.

And McDonald's latest dividend increase, which was just announced, was 3.76%. This is 5% lower than the previous one and 5.99% lower than the previous one. So, that's the concern.

Growth is slowing , but the stock is now cheaper than in recent history.

Over the past 5 years, the highest dividend yield you could have received from McDonald's shares was 3.12%. This is the 100th percentile. And this is one of the highest in the last 10 years.

It has been in the 98th percentile over the past 10 years , where the median dividend yield during that period was 2.35%. So, this is one of the highest dividend yields on McDonald's shares in the last 10 years.

And I wouldn't say that McDonald's dividends are in any way being at risk. The free cash flow payout ratio for the past 12 months is 67.3%. In 2025 it was 71.2%, and you can see that it has always been well below 100% over the last 10 years , ranging from 55% to 59.7% in the last 12 months.

And again, it has been sustainable with payout ratios ranging from 50% to 79% over the past 10 years. And that's reasonable.

McDonald's is a mature company that pays out the majority of their cash flow as dividends. McDonald's shares are getting cheaper , dividend income is increasing, which is a good opportunity for investment.

But here's the problem. Growth at McDonald's is slowing.

You will see in the long run that they are in a good position in the market. Their earnings per share have increased. And in the last 10 years, earnings per share have increased by 123%.

This is a compound annual growth rate of 8.58%. But again, earnings per share have only grown by 8.3% in the last 3 years. This is a 2.95% CAGR, which is slower than dividend growth.

And currently, analysts are projecting single-digit growth in earnings per share in the coming years. Although this is slightly better than recent performance. Similarly, just as it is a good time to invest based on dividend yield, it is also a good time in terms of the PE ratio of McDonald's shares.

Here we are looking at the trailing PE ratio for the last 12 months. It is 19.36. This is the lowest in the last 5 years. And this is the lowest in the last 10 years. Its median value over the last 10 years was 25.84.

Even in all-time perspective , looking back to the Great Financial Crisis , this is one of the best times to invest in McDonald's shares. Its median value since 2007 is 20.83.

So, the key to whether it's right to invest in McDonald's now is whether growth will pick up again, because we know the business is great. We know it is in a dominant position.

It will last for many decades to come. It is a reliable cash provider. We know that the franchise business model has many advantages. McDonald's brand is extremely strong around the world.

The company generated $7.76 billion in free cash flow in the last 12 months , but it has grown by just 7% over the last 3 years. McDonald's is not able to achieve proper growth.

However, it has done much better in terms of operating cash flow , which increased 21% last year to $11.35 billion.

But the bottom line is, you're getting McDonald's shares at a discount now because growth is slowing. If you're a long-term investor , want reliable dividend income, and want to invest in a business that you know will last for decades, McDonald's shares look cheap right now.

As I mentioned earlier, the median adjusted earnings per share and trailing 12-month PE ratio over the last 5 years was 25.67. On that basis, this is the largest discount compared to the median multiple.

And if you assume that it will return to that fair value in the long run , its share price will stand at $322, which is 35% more than it is now. This will be your safety margin, which will provide additional benefits of earnings per share growth and dividend reinvestment.

This is an additional payment beyond the company's earnings per share increase and dividend reinvestment. McDonald's share multiple has been quite consistent over the past decade , averaging 25.45 over the past 10 years.

So, even in the context of that time, it was still a huge discount. However, if we look back to 2007, the median multiple adjusted earnings per share is 22 as a trailing 12-month figure.

So, on that basis it doesn't seem that cheap. It dropped as low as 13.86 during the Great Depression.

However, McDonald's stock has not been this cheap relative to earnings since 2015. And honestly, I think that's why McDonald's stock hasn't done very well in the last 5 years. It was trading at a premium and growth was slowing.

It did n't deserve that premium. You were paying a high price for McDonald's stock. Now it is being traded at a much more fair price.

The same applies to dividends. The average forward-looking dividend yield since 2007 has been 2.6%. It is currently 3.12% and it seems like a good time to invest in McDonald's stock.

But if you're trying to outperform the market over the long term, I don't think McDonald's stock is the right vehicle for that. Over the past 10 years, the total return, including dividend reinvestment, was 10.04% annually.

This is the compound annual growth rate. It has been even better since 1985, with a compound annual growth rate of 13.25%, a large portion of which came from dividend reinvestment.

I think McDonald's stock is more suitable for retired dividend investors now who want a slightly higher yield than the S&P 500, a reliable quarterly dividend that is expected to grow , but I'm not sure if its total return can beat the S&P 500 in the future.