Monday, June 30, 2008

McDonald's Corporation (MCD) Dividend Analysis

McDonald's Corporation, together with its subsidiaries, franchises and operates McDonald's restaurants worldwide. Its restaurants offer various food items, and soft drinks and other beverages.
MCD is a dividend aristocrat as well as a component of the S&P 500 and Dow Jones Industrials indexes. The company has been increasing its dividends for the past 31 consecutive years. From 1998 up until 2007 this dividend growth stock has delivered an annual average total return of 11.00 % to its shareholders. During the first five years, the stock price was in a decline. Ever since MCD hit a bottom in early 2003, the stock has been outperforming the market.
At the same time company has managed to deliver a 6.70% average annual increase in its EPS since 1998.

The ROE fluctuated between 9% and 23%, rising and falling with the fluctuations of EPS over the past decade.

Annual dividend payments have increased over the past 10 years by an average of 25% annually, which is much higher than the growth in EPS. A 25% growth in dividends translates into the dividend payment doubling almost every three years. If we look at historical data, going as far back as 1979, MCD has actually managed to double its dividend payment every four years on average. The company recently switched from paying annual dividends to paying dividend payments quarterly.

If we invested $100,000 in MCD on December 31, 1997 we would have bought 4188 shares (Adjusted for A 2:1 stock split in March 1999). In 1998 your annual dividend income would have amounted to $739. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend income would have risen to $7044 by December 2007. For a period of 10 years, your annual dividend income has increased by 853 %. If you reinvested it though, your annual dividend income would have increased by 752%.

The dividend payout has remained at or below 40% over our study period. In 2007 however, the payout has risen above 70%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

I think that MCD is currently overvalued at a P/E of 27 and a payout ratio of over 75%. The only positive is the solid dividend yield and above average dividend growth. I would consider initiating a long position in MCD on dips below $40.

Disclosure: I do not own shares of MCD

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