Last week I send a newsletter out about Disney (NYSE:DIS), one of the blue chip stocks that I’ve been tempted to buy these days. One reader asked me to take a new look at McDonald’s (NYSE:MCD), which I did and thought it would be very relevant to post here. Not only does MCD offer a much higher dividend yield but it’s also proved to incredibly reliable from all perspectives. I decided to take a deeper look using the top 20 things I look at when judging dividend stocks.
Clearly, McDonald’s has an extremely strong profile. Its dividend yield is a very reasonable 3%, it has increased payouts at a strong pace for the past few years and is actually a dividend aristocrat after increasing payouts for the past 38 years. I did add the comparison with a S&P500 ETF to give you a better context. There are many strong blue chip dividend payers but you could argue that MCD is one of the top ones which carries some weight.
This is where it matters when I personally look at MCD. In order for that dividend yield to be sustainable, I’m looking for:
Strong sales growth
McDonald’s has managed to grow sales by 19.5% (total, not annual) between 2008 and 2013 (S&P500 had 11,3%) and is expected to grow sales by 8% over the next 2 years, almost identical to the S&P500.
Reasonable payout ratio
S&P500 – 17.06 P/E
Overall, I think these numbers are extremely strong. MCD has a very strong business that is growing. I would like to see a bit more bottom line growth and that is the one metric I would pay more attention to but in terms of valuation, I think MCD is trading at a fairly attractive price. It’s not a dirt-cheap bargain but you’d probably never see MCD trading at such a discount either.
While I generally rely a lot more on fundamentals than anything else, I do agree with Benjamin Graham when he says that “In the short run, the market is a voting machine but in the long run, it is a weighing machine”. That is one more reason to make sure it’s an ok entry point:
Industry And Overall Thoughts
McDonald’s is one of those stocks that should be part of any diversified dividend portfolio. It has been around for almost 75 years, has expanded into 119 countries and is one the safer brands that would be expected to do well no matter what happens to the overall economy. That also comes with slower expected growth (burger sales will not double overnight will they?) It has been able to expand by opening new store locations but also expanding its menu in a smart way. It has also managed the move to “healthier” food as well as you could expect and while the burger remains the core of its menu, there are a lot more options these days. Like Coca-Cola (NYSE:KO) and Pepsi (NYSE:PEP), MCD is an iconic brand that has little in terms of global competition and certainly nothing that would threaten its long term growth. I would personally be a buyer at these levels. Would it fit in the USDP? I generally tend to go for a bit higher growth stocks in that portfolio but I could see it happening at some point though because MCD has a lot to compensate for that slower earnings growth.