McDonald's Corp (MCD)

On May 14, 2009 at 10:56 PM, rd80 (99.26) wrote:


McDonald’s should appeal to an investor looking for a core holding in a portfolio designed to produce increasing dividend income.

- Strengths:

Global footprint effectively creates income in a broadly diversified basket of currencies.

At the 14 May closing price of $53.57, MCD yields 3.7%. For comparison, the 10-year treasury yield is 3.1%. Micky D’s achieves that yield with at payout ratio of 46% and has raised the dividend every year since they started paying one in 1976.

The steady earnings growth and a relatively low payout ratio give MCD room to continue the string of dividend hikes.

The business isn’t recession proof, but is recession resistant. MCD has been regularly posting same-store sales increases through the recession.

- Weaknesses:

MCD is a low beta stock, which means it will probably under perform in a bull market

The debt to equity ratio of .82 isn’t out of line, but it could be expensive to refinance when interest rates turn back up.

Uncertain how many years growth can continue – there are only so many places in the world to put a McDonalds.

- Opportunities:

There are still growth opportunities for MCD overseas.

New coffee focus.

Demonstrated ability to test market new menu items and roll them out if testing is successful.

- Threats:

Some jurisdictions are considering menu restrictions or taxes on fast food.

Another run up in gas prices could reduce automobile trips reducing visits to the arches.

The company may not be able to pass commodity price increases along to consumers.

Tight credit markets could limit ability of franchisees to build new restaurants or update existing ones.

There are many strong competitors in the fast food business who could take market share.

- Commentary:

MCD’s five-year average dividend yield is 2.2%. In order to get back to that average, the stock would have to climb to $90.

Foreign exchange has been a crimp on earnings the past couple of quarters. If and when the dollar weakens again, that negative will reverse.

The new McCafe premium coffee focus isn’t likely to be a Starbucks killer, but it doesn’t have to be. Those who want the coffee house experience aren’t going to McDonald’s. However, I suspect a lot of customers are more interested in quick service and a better price; those folks will go to McDonald’s.

In short, McDonald’s is a solid, income producing stock. The company has the earnings growth and cash flow to continue annual dividend hikes. The stock should handily outperform the market averages in a weak stock market, but is likely to under perform in a roaring bull.

You aren’t going to discover any overlooked piece of information on a Dow 30 stock like MCD and it isn’t going to be the quick double you brag about at work. It’s just a boring, steady performer – and that’s a good thing.

CAPS Timeframe – 5 years

Disclosure – Long MCD in RL.