The fast food king, McDonald's (MCD) has struggled over the past few months and recently found itself making new 52-week lows earlier in November. For those who were around last year, many investors and traders flocked to McDonald's' stock as a safe-haven during the harsh volatility and rampant selling. The reasons were simple: solid yield, healthy dividend growth, and sturdy earnings growth. So why the sell-off and is it justified? In my opinion, yes, but I think it offers a prime entry point as well. Let's take a look at McDonald's on a deeper level.
I'll be the first to admit, McDonald's looks pretty darn ugly when you look at the chart. Both the 50-day simple moving average (blue line) and the 20-simple moving average (green) line are below the 200-day simple moving average (red line). In this case, it certainly reiterates the recent pessimism in McDonald's and also indicates that downward pressure could remain, though the stock seems to have substantial support in the low- to mid-$80 range.
Not only is the chart ugly, but sales have been slumping as well with McDonald's postings its first drop in monthly store sales in almost 10 years. For once, it wasn't just Europe to blame on the sluggish sales, but the pain was widespread, with Asia, Africa and the Middle East contributing as well. The slow sales didn't stop there, with the U.S. contributing too, with increased competition as the main reason.
The October sales drop of 1.8%, was the first since March of 2003. It's obvious that an increase in products and better promoting from Yum! (YUM), Burger King (BKS) and Wendy's (WEN) have all attributed to the recent weakness in McDonald's' sales. They have begun refocusing on what makes McDonald's so successful, the Dollar Menu, and rendering their own versions of it for themselves.
Hurricane Sandy also hasn't helped, something that management has pointed to as affecting October sales, and even expects November sales to be slightly lower as a result. While it's clear that Don Thompson, McDonald's' new CEO, has a full plate, many insist it wasn't his fault. Jack Russo, an analyst, had this to say about Thompson and the recent sales drop, "this has nothing to do with Don being in charge. It's just a matter of bad time and bad luck."
It's also hard to cover up the fact that McDonald's has now missed two earnings quarters in a row, with the most recent one in October, displaying the worst quarterly restaurant sales growth in nine years. Along with currency fluctuations having an effect, drooping sales was the main concern and still remains to be. So again, is this sell-off justified? Absolutely.
While there is a lot of speculation about McDonald's losing market share and having its future growth shrink, there's something that many investors are overlooking: it's simply the best in the business. They have phenomenal management, great brand recognition, over 34,000 stores worldwide and simply do any amazing job selling their product. In a recent article by fellow Seeking Alpha Contributor David Trainer, you can quickly see why McDonald's is reaching critical levels for purchasing.
With McDonald's, I think there are two important elements that shareholders must embrace, ROI (return on investment) and dividend payouts. Since 2001, McDonald's has returned 17% annually to shareholders, a mark that most companies can only dream of. Accompanying these capital gains is a constantly increasing dividend, making it hard for shareholders to hold much of a grudge against McDonald's' recent weakness, after such an amazing, long-term performance.
With a PE ratio of 16, it certainly isn't impossible for it McDonald's to continue its downward slide. However, its dividend yield of 3.6% is something that can really help bolster the stock price, as many investors have been waiting months for McDonald's to get back to these levels. After all, with a 52-week high of $102, a price around $85 seems like an early Christmas gift to many long-term investors.
McDonald's currently pays out an annual dividend of $3.08, or $.77 quarterly, and consistently at that. Beginning in 2008, McDonald's starting paying out a dividend four times a year, beginning at $.38. Since then, around the end of November, McDonald's has raised its dividend payment each of the past five years and most recently did so this year, increasing the payout by 10%, up $.07 from $.70.
So, at least for myself, I have come to the conclusion that, while McDonald's has performed better in the past, it is still the marquee fast-food king. For long-term investors I think this is a great company to add to portfolios, even if short-term turmoil still lies ahead. After all, buying the dips on great companies is a great investment strategy. Below I will demonstrate how I would invest in McDonald's for the long-term using options:
SELL 1 December 85 PUT @ 1.25
Net Credit: $125
Cost Basis if Assigned: $83.75
I think selling puts is a fantastic way to gain access to shares of stellar, long-term companies. When you sell naked puts, the biggest risk of course, is being assigned. Unless, your entire goal is to be assigned all along, then the risk suddenly vanishes a bit. While McDonald's could fall far beyond $85, that doesn't mean you would be any better off holding the outright stock over the short put anyways.
Essentially what we're shooting for is McDonald's closing below $85 by December expiration. We picked December because it is the front-month, and in options that means the time premium will decay faster than any other contract, aside from weekly options. As of this writing McDonald's is currently trading for $85.75. Our goal is for it to fall an additional $.75, and close below that mark by the third week in December.
If it does close below $85, you, the naked put seller, will be assigned 100 shares of MCD for $85 apiece, for a total cost of $8,375. The total cost normally would be $8,500, but because we took on the risk of owning 100 shares, we were paid $125, or $1.25/share, to do so. Thus lowering our overall cost basis to $83.75 per share, or just a hair above the 52-week low of $83.31.
While I certainly think there is short-term turmoil ahead, I still think McDonald's is a fantastic position for a long-term investor. Short- to intermediate-term bearishness is a great way for long-term bullish investors to get a shot at a great stock at a great price. I am currently gathering information for an article on the short-term bearishness that lies ahead, but am bullish on McDonald's long-term.