Monday, September 26, 2011

McDonald’s: A true champion for dividend investors

McDonald’s Corporation (MCD), together with its subsidiaries, operates as a foodservice retailer worldwide. It franchises and operates McDonald’s restaurants that offer various food items, soft drinks, coffee, desserts, snacks, and other beverages, as well as full or limited breakfast menu. As of June 30, 2011, the company operated 32,943 restaurants in 117 countries, including 26, 598 franchised restaurants; and 6,345 company operated restaurants. Check my analysis of McDonald’s (MCD).

McDonald’s beefed up its quarterly dividend by 14.80% to 70 cents/share. This most recent dividend hike marks the 35th consecutive annual dividend increase for this dividend aristocrat. The company has managed to keep growing its same store and total sales worldwide, even during the financial meltdown of 2008 - 2009 as well as the recent fears of a double dip recession. Since the start of the financial crisis in 2007, McDonald’s has managed to raise dividends per share by 86.70% and earnings per share by 137%. The stock is up 48.30% since the end of 2007. This calculation does not even include dividends. An investment at the end of 2007 would be generating a yield on cost of 4.80%.

McDonald’s has been able to achieve sales growth through innovation in its menu, introduction of different drinks as well as using its dollar menu items. Since introducing its “Plan to Win” strategy eight years ago, the golden arches has focused its strategy on internal growth through maximizing existing restaurants’ profitability. In addition, the company has focused on its stores profitability and focusing efforts on strengthening its strong brand name, by disposing of non-core assets such as Chipotle Mexican Grill (CMG) and Boston Market. The international segment, which accounts for over half of its sales, is a major driver of growth, which would not slow down even if the fears of a global double dip recessions do materialize. A major part of the strategy is focusing on generating cash flow, rather than focusing on growth for growth’s sake.

Analysts are expecting 13.50% increase in EPS in 2011 to $5.20/share, followed by a 10% increase to $5.72 /share in 2012. The new annual dividend rate of $2.80/share is sustainable at a conservative 54% dividend payout ratio. Currently, McDonald’s is attractively valued per my entry criteria at 16.80 times 2011 earnings. Investors will also get paid a 3.20% yield on cost, which will be growing by at least by 10% per year for the next decade. I will consider adding to my position in the stock subject to availability of funds.

Full Disclosure: Long MCD

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  1. I've had my eye on MCD for over a year and haven't pulled the trigger yet. My valuation skills are still in their infancy (and heavily influenced by how I used to value growth stocks over big dividend payers) so when my three models returned an average price that is right about where MCD is trading right now it gave me pause due to there being no apparent margin of safety. I'm considering taking advantage of the market decline to open up a position as a sort of "trial run" to see if I can identify errors in my thesis on the stock as time goes on (and letting the dividends re-invest themselves in the meantime!).

  2. In a down market, it makes more sense to invest in a company like McDs. Good or bad economy, people love McDonalds!

  3. Just picked up MCD. Dividend Champion that would take a world wide depression to bring down.

  4. I just wish I'd bought MCD 16 years ago instead of 2. But back then our investment club foolishly thought America was going to start eating healthy. There was even a proposal to buy Boston Chicken, thank god we passed on that one:) Any thoughts on a good liquor company?


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