McDonald's Transition Could Provide An Entry Point For Dividend Growth Investors

| About: McDonald's Corporation (MCD)

Last week, McDonald's (NYSE:MCD) CEO Jim Skinner announced that he will be retiring from the company on June 30, 2012, after more than four decades on the job. His replacement will be current chief operating officer and President Don Thompson. Skinner led McDonald's during its post "Supersize Me" revival and has done a tremendous job integrating new products (McCafe comes to mind), re-modeling dreary stores and increasing both earnings and revenue. His rise from assistant store manager to CEO without a college degree seems nearly impossible to replicate, and his understanding of the day-to-day business and McDonald's customer is unparalleled.

That being said, Don Thompson is no slouch either. He started his career at McDonald's 22 years ago, and has quickly risen to become Skinner's heir apparent and second in command. Knowing the debacle that ensued the last time McDonald's changed CEO's, we think the company has developed a deep bench and has been grooming Thompson for the role for a few years. While Skinner's leadership will be missed, we think the team currently assembled should continue to develop new, profitable products and expand the brand across the globe.

Still, after easily outperforming the broader market, up over 30% is 2011, the stock is down nearly 3% so far this year. Worries of higher input costs and weak growth in Europe have been weighing on the stock, even while the company continues to post record sales figures in the US. Additionally, investors reacted negatively when Skinner announced his retirement. We think any further weakness could lead to an attractive entry point in the actively-managed portfolio of our Dividend Growth Newsletter. We're confident in Thompson's ability to run the company, and we think the firm will continue to flourish.

Further, McDonald's has made itself quite the dividend payer over the past several years. After raising its dividend 26% in 2010, the firm raised it again 10% in 2011, and we forecast that it will raise it yet again in 2012. We think the firm's annual dividend could be $3.47 (vs. $2.80 today) in the next several years. In addition to some nice growth potential, we think the dividend is relatively safe. McDonald's scores a 1.3 on our Valuentum Dividend Cushion, meaning we think the firm has ample cash on hand and will generate enough cash in the future to cover the dividend.

Though McDonald's is near the high end of our fair value range, we expect that range to increase when we update our model following the release of the firm's 10-K filing. However, if shares fall to around $90 per share, we'd be enticed by the 3%+ dividend yield and our view that the McDonald's will continue to grow its dividend over the next several years.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.