Friday, July 2, 2010

McDonald’s Corporation (MCD), a must own dividend stock

McDonald’s Corporation, together with its subsidiaries, franchises and operates McDonald’s restaurants in the food service industry worldwide. The company's share of the US fast food market is several times larger than its closest competitors, Burger King (BKC) and Wendy's (WEN).

McDonald’s is a major component of the S&P 500 and Dow Industrials indexes. The company is also a dividend aristocrat, which has been consistently increasing its dividends for 33 consecutive years. McDonald’s is one of the world’s most recognizable brands. Because of this and because it has performed very well to stockholders over the years, it is one of the most widely held income stocks by dividend investors.

Over the past decade this dividend stock has delivered an annual average total return of 8.70% to its shareholders.

At the same time company has managed to deliver an impressive 12.20% average annual increase in its EPS since 2000. Analysts are expecting MCD to grow EPS to $4.49 by 2010 and $4.87 in 2011.. The economic slowdown is making consumers to trade down and dine out at fast food places like the ones owned by the Golden Arches. Mcdonald’s has been focusing more on expanding the sales of existing restaurants since 2003 versus relying on new stores to be the driver for growth. Same store sales and profits have been driven by product innovation, and comparable-store sales growth, and are part of the company’s recent success. The constant innovations in the menu are indeed fueling strong same store sales volumes. The McCafe Offerings, in addition to the Dollar Breakfast Menu and Restaurant remodeling are further fuelling the growth in sales.

International operations, which accounted for almost half of operating profits in 2008, have been a major growth factor over the past two decades. This however exposes the company to fluctuations in exchange rates, which could add or detract from EPS performance. MCD's stated operating priorities include fixing operating inadequacies in existing restaurants; taking a more integrated and focused approach to growth, with an emphasis on increasing sales, margins and returns in existing restaurants; and ensuring the correct operating structure and resources, aligned behind focusing priorities that create benefits for its customers and restaurants.

The ROE has been increasing since it hit a low of 14 in 2002. Recently it hit 30%, and has stayed above that level for two consecutive years.

Annual dividend payments have increased by an average of 28.20% annually since 2000, which is almost two and a half times higher than the growth in EPS.

A 28 % growth in dividends translates into the dividend payment doubling almost every two and a half years. Since 1979 McDonald’s has actually managed to double its dividend payment almost every four and a half years on average. Future dividend payments would likely grow at 10% for the foreseeable future.
The dividend payout ratio has steadily increased over the past decade, due to the fact the dividend growth was much faster than earnings growth. Currently the payout is at 50% . A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings. The slow growth in earnings could put future dividend increases at risk.

McDonald’s is currently attractively valued. The stock trades at a P/E of 16.50, yields 3.10% and has an adequately covered dividend payment. The company has proven to be somewhat recession resistant. I would be a buyer of MCD at current prices.

Full Disclosure: Long MCD

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