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:
- 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%)
Other ratings for MCD
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.
Thanks for reading!