A Look at McDonald's Rising Dividend

Linked here is a detailed quantitative analysis of McDonald’s Corp. (MCD). Below are some highlights from the above linked analysis:

Company Description: McDonald’s Corporation is the largest fast-food restaurant company in the world. Its restaurants serve a varied, yet limited, value-priced menu in more than 110 countries around the world.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

MCD is trading at a discount to 1.), 2.) and 3.) above. If I exclude the high and low valuations and average the remaining two, MCD is trading at a 16.7% discount. MCD earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:

1. Rolling 4-yr Div. > 15%
2. Dividend Growth Rate
3. Years of Div. Growth
4. 1-Yr. > 5-Yr Growth
5. Payout 15% of avg.

MCD earned three Stars in this section for 1.), 2.) and 3.) above. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (1999-2002, 2000-2003, 2001-2004, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. MCD has paid a cash dividend to shareholders every year since 1937 and has increased its dividend payments for 32 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.
2. Years to > MMA

MCD earned both of the available Stars in this section. The NPV MMA Diff. of the $46,431 is in excess of the $2,500 minimum I look for in a stock that has increased dividends as long as MCD has. MCD’s current yield of 3.57% exceeds the 3.17% estimated 20-year average MMA rate.

Other: MCD is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. McDonald’s competes in the global fast food industry, where it has a very strong international brand. As the global economy continues to slow in 2009, its shares are viewed as a defensive play, with the $2.00/share annual cash dividend as an additional attraction. MCD is recession resistant, but not recession immune. Risks include higher food costs; poor customer acceptance of new menu offerings; competitive discounting; and considering MCD’s substantial international business - exchange rate risk.

Conclusion: MCD earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of six Stars. Since my scale tops out at five, this quantitatively ranks MCD as a 5 Star-Strong Buy.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $150.35 before MCD’s NPV MMA Differential fell to the $3,000 that I like to see. At that price the stock would yield 1.33%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the needed $3,000 NPV MMA Differential, the calculated rate is 3.5%. This dividend growth rate is significantly below the 15.5% used in this analysis, thus providing a large margin of safety. MCD has a risk rating of 1.75 which classifies it as a medium risk stock.

MCD has done quite well during this economic downturn. It was one of the few blue-chip companies to finish up in 2008. With is most recent double-digit dividend increase, MCD has found a place in most every dividend investor’s portfolio. I recently increased my position in MCD to 4% of my income portfolio. For additional information, including the stock’s dividend history, please refer to its data page.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I was long in MCD (4.0% of my Income Portfolio). What are your thoughts on MCD?

This article originally appeared on The DIV-Net April 20, 2009.

Comments

[naidle]

Great read (and disclaimer). Much appreciated!

2009 May 03 06:06 PM

[atlus1432]

Thanks - appreciate your blog - I have a question for you - have you ever run an analysis which factors in an investor or trader who aquires the shares by selling naked put contracts at a lower strike. That would really improve ones YOC. This is a strategy that I implement quite successfully to generate cash flow. What I like about your approach is the fundamental reasons why aquiring the stock makes sense from a dividend perspective. I usually immediately sell call contracts against any long position that I am assigned to to again, generate more monthly cash flow but now your insights into YOC make me wonder if that is my best approach. I still think that unloading the shares the following month becasue they have been called away (after I took assignment) is superior simply due to the minimal legth of time required to garner those profits. I can always repeat the process next month and sell naked out contracts with the intenet to re-aquire the same shares. This approach has averaged my individual portfolio more than 42% per year for the past 3 years. This approach came about after getting my head handed to me repeatedly by trying to directionally trade individual stocks and even the options themselves but now I am happy to collect premium month in and month out. Given I am full time trader/investor and an expert in Excel programming your platform intrigued me. You show it as a link to download off your site and it is impressive but it appears that the data that is being analyzed has been selected by you. Is there a way that I can populate this with my own stocks ? Is there a user manual on how to use and understand the tool. I think its great but I would like to learn your approach and methedology and then perhaps input an analysis where I compare returns against my own methedolgy using the selling of options to bth aquire the shares and as my tool to sell them.

Thanks for the great work - this coming from a technican - not a fundamental trader/investor such as yourself - you have opened my eyes and for that I am thankful.

Fulcrum Shift Trading

2009 May 08 09:47 AM