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Summary

  • MCD is among stocks with a high yield and low volatility suitable as an alternative to bonds.
  • MCD's valuation is compelling given discount to the consumer discretionary sector.
  • MCD's dividend is attractive given a long history of increases and conservative balance sheet.

Recently, Citi Equity Research released an updated list of global bond refugee stocks. Stocks with higher dividends and lower volatility as an alternative to bond investments. Among companies making the cut is McDonald's (NYSE:MCD), with a current dividend yield of 3.2%. Below, we continue our review of MCD in Part XI of this series.

Bond Refugee Recommend Actions:

Overall Bond Refugee Rating: Buy

Valuation: Attractive

Dividend Stability: Highly Attractive

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Background

MCD operates and franchises fast food restaurants in both domestic and international markets. MCD is one of the most widely-recognized brands in the world.

Valuation

MCD has a market capitalization of $110.4 billion, enterprise value of $111.1 billion and trades at 18.5 times trailing earnings and 16.2 times projected earnings. MCD PE stands at a 19% premium to the S&P 500, but a 12% discount to the consumer discretionary sector. MCD discount to the sector is slightly lower at 9.5% on a forward earnings basis.

MCD earnings are expected to grow at a 7.4% annual rate over the next five years.

We rate MCD as attractive, based on bond refugee criteria that stresses relative value and stability of income.

  • MCD's valuation is compelling given the discount to the consumer discretionary sector.
  • Dividend yield is double the consumer discretionary sector yield.

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Dividend Stability

MCD has a long track record of increasing dividends. MCD shifted from a quarterly to annual payout for a number of years, but ultimately returned to the quarterly payout structure. From a financial perspective, MCD has a very conservative balance sheet with debt at 1.3 times EBITDA. MCD paid out nearly 60% of earnings, and returns additional capital to shareholders through stock buybacks.

We rate MCD's dividend stability as highly attractive.

  • MCD's history and commitment to dividend growth
  • Conservative balance sheet and payout ratio leave little likelihood dividends will be cut.

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Sources:

Yahoo Finance

Wall Street Journal

S&P

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: McDonald's: Dividend Stocks From The Bond Refugee Screen - High Yields And Low Volatility