I’m back onto a stock analysis today with a surprising stock. I use the word surprising as I didn’t realize that MCD had such a huge capital appreciation over the past decade. This stock has grown by more than 240% over the last 10 years. When you add a healthy dividend payout to the equation, you have the definition of paradise for most dividend investors. Now let’s take a look at McDonald’s to see why it has gone through such growth in a tough economic period and if there is still juice in the Coke bottle to sip for more.

 

MCD

 

The Company Stock Description:

McDonald’s is the world largest fast food restaurant chains and operates in over 110 countries. They are known for the talent to select the best locations across the world. The past 10 years’ incredible stock performance is directly related to a major change in the company back in 2003. MCD invested massively in renovating its existing restaurants, expanded its menus (and added healthier food at the same time) and its hours of operation. These new measures combined with an aggressive franchise growth strategy in emerging markets contributed greatly to Mickey D’s financial results.

Stock Graph

mcd technical

The Company Ratios and Financial Info:

Dividend Metrics
 
Current Dividend Yield2.91%
5 year Dividend Growth21.24%
1 year Dividend Growth12.93%
Company Metrics
Sales Growth (1 year)12.17%
Sales Growth (5 year)5.26%
EPS Growth (1 year)15.07%
EPS Growth (5 years)13.24%
P/E ratio18.2424
PEG Ratio (3 year expected)1.5847
Payout ratio48.00%
Return on Equity37.92%

 

When you look at MCD’s metrics, there is a lot of interesting and positive data. The EPS is fairly stable (15.07% for 1yr vs 13.24% for 5 yr) and the ROE is also on the positive side (11.86%). Surprisingly, MCD shows strong sales growth for a mature market (5.26% over 5 years). I guess the fact that people have less money and are tempted to eat cheap along with impressive growth in emerging markets are 2 big contributors.

 

MCD is not only a Dividend Aristocrat; it has everything to keep it going. The payout ratio is fairly low (50%) and the dividend growth is aggressive (13.94% for 5yr). Since the sales are going up and the company seems very strong financially, there is no reason to think that the dividend yield cannot be sustainable.

 

Stock Technical Analysis

 MCD Trend

 

MCD is currently trading on a downtrend. Click here to get the complete trend analysis report for free.

 

Upcoming opportunities and dangers:

 

McDonald’s main strength in my opinion lies in its capacity to replicate its “perfect” business model everywhere in the world. Last year MCD announced their first restaurants in Bosnia, proof that there is no market that is too rough for MCD! MCD recently confirmed their 2012 sales expectations to increase by 5.5% to 6.5% again. This is definitely a model of stability!

 

One *small* danger I can see is the retirement of MCD CEO, Jim Skinner, who has been at the helm for the past… 41 years! Don Thompson, currently President and Chief Operating Officer, will take charge. Since Thompson has been with the company for a long time too, we shouldn’t see a big change. McDonald’s strong culture is in place to stay in my opinion.

 

An additional danger for MCD is definitely the thin line that exists between promoting it’s Big Mac and finding healthy food. In December 2011, MCD faced at $1.8M fine in Brazil saying that McDonald’s was encouraging children to eat junk food through the promotion of its Happy Meals. On the other hand, MCD has made lots of effort to expand its menu and create healthier food. It’s far from being perfect but I guess that the change has already started. The rise of McCafé is another way for McDonald’s to increase their sales through other products that are less related to junk food (without saying that coffee is good for health, right?). Premium chicken and Angus beef also shows MCD’s interest in offering higher quality products and gradually move forward to a “higher standard” fast food chain. In my opinion, the menu evolution must match consumers’ new taste in order to prevent a sales decrease. So far, MCD has been able to show that they can adapt quite fast to the industry even though they are a huge mammoth in the fast food sector.

 

When you compare McDonald’s to its main competitors (Burger King, Wendy’s and Yum!), you can tell that MCD is still in the driver’s seat for a few years at least. Especially when you consider that MCD sales are about 10 times greater than Burger King’s. Profit margin is also another place where MCD is dominating (over 20% as compared to 10% for Yum!).

 

Final Thoughts

I’d say that MCD is definitely a great stock to hold due to its leadership position coupled with a great dividend growth history. The biggest “negative” point I can see at this stage it’s MCD P/E ratio. At 18 or so, it’s far from being a deal. On the other hand, if the company continues to raise its dividend by double digits and show consistent sales growth, it might be enough to be part of my portfolio! I currently don’t hold MCD stocks but it will definitely be on my watch list for future trades.

 

Start Dividend Investing
Subscribe to our exclusive Dividend Mailing List and download your free Dividend Investing Guide
We hate spam just as much as you & will respect your privacy


You are interested in dividend investing? Check out my Free Dividend Investing eBook and don't forget to sign-up to my RSS Feeds!
12 Comments   |  

12 Comments

Michel
April 25, 2012, 6:33 am

Ìt’s definitely on my watch list also! I would hope to get it 8 to 10% less. Great stock for RRSP.

Mike
April 25, 2012, 8:51 am

Right now, it’s on a downtrend (since the beginning of this year) so you can expect to buy it shortly :-D

Shawn
April 26, 2012, 10:22 am

What’s going to happen when the US dividend tax laws change Jan 1 2013?? Right now there is a 15% withholding tax for Canadians who get paid US dividends. After Jan 1 will that 15% change to a much greater number like 35% withholding tax? or is it going to stay the same? any idea?

April 26, 2012, 11:29 am

Interesting information – this looks like one to watch. It sounds like things will be heating up come late summer.

April 27, 2012, 1:59 pm

Great company. I’ve held MCD for over a year now in my retirement account. Looking to buy more on dips. Unlike some other fast food chains McDonald’s actually owns the real estate their restaurants operate on (^_^)

April 28, 2012, 7:00 am

[...] -McDonald’s (MCD) Dividend Analysis @ TheDividendGuyBlog -Should income investors worry about higher taxes? @ DividendGrowthInvestor [...]

April 28, 2012, 10:40 am

I always love this kind of stock. As long as people need to eat, Mcdonalds will still sell. It also means that this kind of company is crisis proof.

May 4, 2012, 2:00 am

[...] Guy presents CD McDonalds Dividend Stock Analysis posted at The Dividend Guy Blog, saying, “We look at the status of this [...]

May 9, 2012, 6:02 am

[...] the analysis of MCD last week, there was another stock on my radar that I wanted to check out. To be truly honest, I [...]

May 23, 2012, 6:56 am

[...] MCD (47.42% for a 2.92% yield) [...]

June 25, 2012, 7:04 am

[...] don’t want to cash out your 10%-20% profit and realize that your stock will do as well as MCD for the past 10 [...]

February 11, 2013, 6:44 pm

[...] I mentioned that I wanted to buy shares of a consumer stock. I have had my eye on McDonald’s (MCD) for a while now but want to open my horizon. I would have bought MCD when it was trading at $88 [...]

Post Comments

Notify me of followup comments via email