Wednesday, September 24, 2014

Recent Buy: MCD


Sep 22, 2014: Bought 27 shares of MCD at $93.97 per share.

Founded in 1955 by Ray Kroc and incorporated in December 1964, McDonald's Corp. (MCD) is the world's leading global foodservice retailer with over 35,000 locations in more than 100 countries. Operating primarily as a franchisor, MCD owns the land and building or secures long-term leases for both franchised and company-operated restaurant sites. More than 80% of McDonald's restaurants are owned and operated by independent business men and women. About 57% are conventional franchisees and 24% are licensed to foreign affiliates or developmental licensees.

MCD is a Dividend Champion with an impressive streak of 39 years of dividend increases. It pays quarterly dividends in March, June, September and December. The newly announced dividend of 85¢ per share makes my starting yield on cost 3.62%. With two consecutive dividend increases of only about 5%, MCD's 5-year dividend growth rate is now 9.86%.

The stock has outperformed the S&P over the past 10 years by a healthy margin, as is evident in the graph below. For the past 3 years, though, MCD's performance has been lackluster, while the S&P 500 has been very bullish. MCD has a low 5-year Beta averaging only 0.36.


Analysis of MCD


My fair value estimate of MCD is $94.10, so I'm picking up shares at about fair value. The following table provides some key statistics, with highlighted values relating directly to my selection criteria.


MCD passes the following of my selection criteria:
  • A streak of at least 5 years of dividend increases (39 years)
  • Dividend yield exceeds 2.75% (3.62%)
  • Chowder rule: Dividend yield plus 5-year CAGR exceeds 12% (13.48%)
  • Price to earnings ratio (P/E) is less than 20 (TTM 16.98x and Forward 16.08x)
  • Reasonable confidence in continued dividend growth (Yes)
MCD fails the following of my selection criteria:
  • Earnings per share (EPS) percentage payout is less than 40% (MCD: 61%)
  • Debt to equity ratio is below 50% (MCD: 96%)
  • P/E to annual EPS growth (PEG) ratio is less than 2 (MCD: 2.76)
  • 5-year CAGR is at least 10% (9.8%)
  • Price discount is at least 5% of fair value estimate (0.18%)
Based on these statistics, MCD earns 4 out of a possible 7 stars: (****---)

The following chart shows MCD's dividend payments and earnings per share over the last 10 years. MCD has grown its dividend steadily and the EPS growth similarly is trending up, even though earnings were unimpressive in 2007 and have been plateauing lately:


Other ratings for MCD


 Zacks Rank  4-Sell
 S&P Capital IQ's Stock Report (***--) Hold
 Thomson Reuters StockReport+   (6/10) Neutral 
 MorningStar Rating (***--)
 The Motley Fool's CAPS Rating  (***--)

Concluding Remarks


Earlier this month I analyzed Mattel Inc. (MAT), the top candidate in the Consumer Discretionary sector on my September dashboard of dividend growth candidates. Before I would consider buying shares of MAT, I need to see evidence that the company can start growing earnings again and that strategic plans are in place to sustain that growth.

With MAT out of the picture for the time-being, I needed to find another Consumer Discretionary candidate, as DivGro is currently underweight in this sector. MCD turns out to be that candidate!

I've been looking for an opportunity to buy MCD for a while now. Since May 2014, MCD's share price has dropped by 10% from its all-time high of $103.78. Several factors contributed to this price drop. From the tainted meat problem in China, to missing expectations on July 22 when the company reported a profit of $1.40 per share on just 1% growth in sales, to dismal global same-store sales in August (the worst since 2003), MCD can't seem to catch a break.

But MCD is a powerhouse as far as fast-food restaurants are concerned and I'm convinced it will overcome these challenges. A recent article points out that McDonald's 2013 U.S. sales topped the combined 2013 U.S. sales of Subway, Burger King, Chipotle, Five Guys and Wendy's by more than one billion dollars. So McDonald's is much, much bigger than its closest competitors.

Strong growth in emerging markets should help the company meet its long-term goal of 3-5% growth in sales. MCD has accelerated its international expansion, especially in China where it opened 225 new stores in 2013 and where it will open some 300 more by the end of 2014. 

MCD is investor friendly, with an amazing track record of dividend increases, a competitive 3.6% yield and an aggressive share buyback program. For example, in the last 10 years, McDonald's has reduced the number of outstanding shares from 1.274 billion to 993 million. In 2013, the company spent $1.81 billion on share repurchases.

27 shares of MCD adds $91.80 of expected dividend income, increasing DivGro's projected annual dividend income to $4,773.14.

Thanks for reading! 

8 comments :

  1. Very nice buy! MCD has become a popular buy but I wonder if they trail lower or higher after the next earnings report. I plan on making small purchases in the upcoming weeks in MCD as well as APPL. Thanks for sharing!

    ReplyDelete
    Replies
    1. Hi Dividend Mongrel! Yes, in my view, MCD is giving newer DG investors a break with its 10% price drop since May... Good question about the impact of the next earnings report. Some of the expectations of lower earnings could be priced in already, though, so you never know. I'm assuming you mean AAPL.

      Take care!

      Delete
  2. Ha, I really like MCD as well, for all the reasons you state! It's tied for first on my Oct watchlist (the other is PCLN, for my speculative/non-DG portfolio). I have a small position in MCD right now, but hope to load up on it in the coming few months. Quick correction, you said "other ratings for DE", not MCD.

    ReplyDelete
    Replies
    1. Thanks for spotting that typo -- that's what happens when you use a prior post as a template for new ones! As far as my purchase of MCD is concerned, I'm happy to finally get a chance to add MCD. I've been waiting for the stock price to come down for a long time.

      Delete
  3. I've been building a position with MCD through Loyal3 and have been lucky enough to have gotten in at some good price points over the last few months. I hope the price stays depressed for another few months while I continue to build out a position.

    ReplyDelete
    Replies
    1. Although I don't have an account with Loyal3, my 3 sons do! I wrote about it in a post, here:

      http://divgro.blogspot.com/2013/12/a-different-kind-of-present.html

      You might get more chances to pick up shares at depressed prices with MCD's next earnings report in Oct. If it disappoints, MCD could find itself drop back down to this level or lower. Good luck!

      Delete
  4. Nice buy DivGro...just in time for the dividend raise! We also own MCD in our family's dividend stocks portfolio. Great company with 37 years of consecutive dividend increases! Keep selling those Big Macs, Chicken Nuggets, and don't forget your morning lattes! :)

    Cheers to continued dividend growth! AFFJ

    ReplyDelete
    Replies
    1. Yes, a nice initial yield on cost due to the dividend raise! I think it is 39 years now... amazing!

      Take care and good luck!

      Delete

Contact Form

Name

Email *

Message *

Follow by Email