McDonald’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 Earnings Per Share (EPS) & Dividend Growth
- 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’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
- 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%).
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
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.
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?