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McDonald’s Corp (MCD) Dividend Stock Analysis

mcDonalds logoMcDonald’s Corp (MCD) is the largest fast food company in the world with over 33,700 restaurants in 119 countries.  McDonald’s US sales amounted to about $32 billion last year.  However, if you have ever managed to get out of your house and drive around a bit, you have noticed that the US is saturated with McDonald’s.  Over the last two decades the primary source of growth for McDonald’s has been global.  Last year, about 57% of MCD’s income was from non US sources. In addition to increasing its global presence, McDonald’s is focusing on increasing sales and margins across its restaurants.

McDonald’s Corp Basic Company Stats

  • Ticker Symbol: MCD
  • PE Ratio: 17.85
  • Yield: 3.2%
  • % above 52 week low: 59.7%
  • Beta: 0.34
  • Market cap: $94.3 B
  • Website: www.mcdonalds.com

MCD vs the S&P500 over 10 years

MCD vs SP500MCD has consistently outperformed destroyed the S&P500 for the last decade.  By the end of 2012 an investment in MCD would have increased by about 600% compared to about 80% for the S&P500 as a whole.

MCD Earnings Per Share (EPS) & Dividend Growth

MCD divs and EPS

  • 5 year EPS growth: 9.3%
  • 10 year EPS growth: 18.3%
  • 5 year dividend growth: 15.2%
  • 10 year dividend growth: 24.5%

EPS for McDonald’s have been growing steadily.  Similarly, MCD’s dividends have also been growing nice.  The 10 year dividend growth rate was 24.5%, the 5 year growth rate as 15.2%, and the one year growth rate is 13.4%. It seems like dividend growth is starting to flatten out in the low teens.  Dividend growth will eventually have to slow down to match EPS growth, so this is to be expected.

The dip in EPS in 2007 was due to a large impairment charge (a charge related to writing off worthless goodwill) related to licensing MCD’s South American, Latin American, and Caribbean businesses.

With a starting yield of 3.3% and a growth rate of about 13%, MCD’s yield on cost will grow to about 11% in 10 years.  In order to double the dividend, using the rule of 72, it will take approximately 5.5 years.

MCD Payout Ratio

MCD payout ratio

MCD’s payout ratio has remained below 50% for eight of the last 10 years. 2007 was an oddity where it shot up past 70%, due to the impairment charge related reduction in EPS.  In recent years the payout ratio has been creeping up, and hovering around 50% from 2009 to 2012.

MCD Cash Flow Per Share and Revenue

MCD cash flow per share

  • 10 year revenue growth (2003-2012): 5.4%
  • 5 year revenue growth (2008-2012): 4.1%
  • 3 year revenue growth (2010-2012): 7.1%

MCD is a cash cow.  Cash flow per share increased every year except 2007.  Revenue growth also remains strong.  As the economy improves and people gravitate away from cheaper fast food towards more expensive restaurant fair, it’s possible that MCD’s revenue growth may slow.

MCD Balance Sheet

The current debt to equity ratio of MCD is 96%. This is notably higher than the average debt to equity ratio for equities (~40%) and the debt to equity ratio for restaurants (~70%).

MCD Risks

The primary risk facing McDonald’s is food inflation.  If food prices increase MCD will be forced to decide between smaller profits on its sales or having to increase its prices and potentially drive customers away.

Economic conditions may also affect MCD.  There is the risk that if the global economy slows down, MCD will lose sales.  With such a large portion of its revenue coming from non US sources, this will certainly be felt.

MCD Valuation Panel

Graham Number

The Graham number represents one very simple way to value a stock.  The Graham number for MCD is $40.84.  The current stock price is well above that, suggesting that MCD may be overvalued at the moment.

Two Stage Dividend Discount Model

Using a discount rate of 10%, the beta of 0.34, an initial dividend growth rate of 13% for 5 years, and a terminal dividend growth rate of 7%, the two stage dividend discount model produces a value of $71.68.  MCD still appears slightly overvalued, but changing the inputs of the model subtly, will produce different valuation numbers.

MCD Cash Secured Puts

MCD feels a bit overvalued to me.  As much as I like the company, I don’t think it’s put material at this time.  I would be happy to add to my existing position in MCD though.

Conclusions

Overall, I like MCD as a company.  While it is slightly overvalued at the time of this writing, I feel that it is appropriately valued to initiate or expand an existing position.

Disclosure: I am long MCD.

Readers:  What are your opinions about McDonald’s Corp?

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17 Responses to "McDonald’s Corp (MCD) Dividend Stock Analysis"

  1. Great breakdown on MCD! I did hold some shares in MCD but got out at the high a couple of years ago at the high. I have been thinking about getting back into it myself lately, though I do have some concerns in regards to how the economic conditions worldwide will impact them.

    1. MFIJ says:

      I love MCD. I think it’s a solid company and I’m considering buying some more, especially if it dips a bit. I could worry a little about economic conditions, but I’m not sure if there’s another company out there with as recognizable a brand name. Maybe Apple or Coke.

  2. Fantastic analysis of McDonald’s I absolutely love the company and business and can’t wait to own the stock. As you stated it is overvalued however I believe in the next stock market correction we could a chance to own it. I don’t think anyone in their right mind could argue Mcdonalds won’t be around 20 years from now.

    1. MFIJ says:

      MCD will be around 20 years from now and probably continuing to rake in money hand over fist. It’s a bit overvalued at the moment, but so is everything else. I should have some capital available in a few weeks. We’ll see if MCD makes the cut for the March/April purchases.

  3. Thanks for the breakdown. My daughter thinks McDonalds is gourmet cooking, so it would be nice to own some stock when we buy those crappy Happy Meals!

    1. MFIJ says:

      Kim,

      I hear you. MCD’s food is so-so, but people love it and I don’t see that changing at all in the future. So I’ll keep on investing.

  4. McDonald’s is taking over the world! Seriously, my daughter has only been there a few times but she can spot the golden arches from a fair distance away. Their marketing plan must be amazing.

    1. MFIJ says:

      MCD does have some incredible marketing. And they’re expanding all over the world. What I like even more about MCD’s global expansion is that they alter their menu to fit the local culture. Which I figure all but gaurantees them success.

  5. Love these analysis posts – they are so educational for me! MCD is definitely on our list of considerations for when we start investing in stocks – seems like a no-brainer to me. No matter how broke they are, seems people are still willing to stop at McDonald’s regularly.

    1. MFIJ says:

      I love MCD. As soon as it dips again, I’m going to be very tempted to buy some more.

  6. MCD has such a strong brand it’s insane. My niece isn’t allowed to eat there, but at 3 years old she knew about it from friends.
    I do think food inflation is going to be an issue for MCD and other restaurants, especially if these droughts continue.

    1. MFIJ says:

      I worry a little about food inflation. But let’s be honest, MCD isn’t known for high quality food. Inflation might drive the prices up a bit, but they can always reformulate their products.

      Aside: the word “reformulate” has no business ever being used with food.

  7. [...] McDonald’s Dividend Stock Analysis by FI Journey [...]

  8. Gurjit Sidhu says:

    I was curious why you don’t consider MCD a candidate for Cash Secured Puts but you do consider it a candidate for starting or increasing a position?

    Would the Put be even more desirable since if you get assigned it actually lowers your entry price?

    1. MFIJ says:

      I can see how that might be a little bit confusing. When I sell long-term cash-secured puts, my intention is usually that they’ll expire worthless thus freeing up the cash for the sale of another put. Since MCD is so close to its 52 week high, I’m not confident that MCD will be above that when the put expires and I’ll wind up getting assigned the stock.

      I do feel that puts are a great way to enter any position (assuming that you are intending to be assigned the stock) so long as you have the cash on hand to afford 100 shares.

      1. Gurjit Sidhu says:

        Thanks so much for the response. Makes a lot of sense.

  9. Marvin says:

    I still think Mcdonalds is overvalued but really like their growth in foreign markets. The risk of inflation eating away at their profit margins is a huge concern because I do not see the consumer spending more money at fast food restaurants.

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