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I’m back onto a stock analysis today with a surprising stock. I use the word surprising as I didn’t realize that McDonald's (MCD) had such a huge capital appreciation over the past decade. This stock has grown by more than 240% over the last 10 years. When you add a healthy dividend payout to the equation, you have the definition of paradise for most dividend investors. Now let’s take a look at McDonald’s to see why it has gone through such growth in a tough economic period and if there is still juice in the Coke bottle to sip for more.

(click to enlarge)MCD

The Company Stock Description:

McDonald’s is the world largest fast food restaurant chains and operates in over 110 countries. They are known for the talent to select the best locations across the world. The past 10 years’ incredible stock performance is directly related to a major change in the company back in 2003. MCD invested massively in renovating its existing restaurants, expanded its menus (and added healthier food at the same time) and its hours of operation. These new measures combined with an aggressive franchise growth strategy in emerging markets contributed greatly to Mickey D’s financial results.

Stock Graph

(click to enlarge)mcd technical

The Company Ratios and Financial Info:

Dividend Metrics
Current Dividend Yield 2.91%
5 year Dividend Growth 21.24%
1 year Dividend Growth 12.93%
Company Metrics
Sales Growth (1 year) 12.17%
Sales Growth (5 year) 5.26%
EPS Growth (1 year) 15.07%
EPS Growth (5 years) 13.24%
P/E ratio 18.2424
PEG Ratio (3 year expected) 1.5847
Payout ratio 48.00%
Return on Equity 37.92%

When you look at MCD’s metrics, there is a lot of interesting and positive data. The EPS is fairly stable (15.07% for 1yr vs 13.24% for 5 yr) and the ROE is also on the positive side (11.86%). Surprisingly, MCD shows strong sales growth for a mature market (5.26% over 5 years). I guess the fact that people have less money and are tempted to eat cheap along with impressive growth in emerging markets are 2 big contributors.

MCD is not only a Dividend Aristocrat; it has everything to keep it going. The payout ratio is fairly low (50%) and the dividend growth is aggressive (13.94% for 5yr). Since the sales are going up and the company seems very strong financially, there is no reason to think that the dividend yield cannot be sustainable.

Stock Technical Analysis

(click to enlarge)MCD Trend

MCD is currently trading on a downtrend. Click here to get the complete trend analysis report for free.

Upcoming opportunities and dangers:

McDonald’s main strength, in my opinion, lies in its capacity to replicate its “perfect” business model everywhere in the world. Last year MCD announced their first restaurants in Bosnia, proof that there is no market that is too rough for MCD! MCD recently confirmed their 2012 sales expectations to increase by 5.5% to 6.5% again. This is definitely a model of stability!

One small danger I can see is the retirement of MCD CEO, Jim Skinner, who has been at the helm for the past… 41 years! Don Thompson, currently President and Chief Operating Officer, will take charge. Since Thompson has been with the company for a long time too, we shouldn’t see a big change. McDonald’s strong culture is in place to stay in my opinion.

An additional danger for MCD is definitely on the thin line between promoting its Big Mac and offering healthy food choices. In December 2011, MCD faced at $1.8M fine in Brazil saying that McDonald’s was encouraging children to eat junk food through the promotion of its Happy Meals. On the other hand, MCD has made lots of effort to expand its menu and create healthier food choices. It’s far from being perfect but I guess that the change has already started. The rise of McCafé is another way for McDonald’s to increase their sales through other products that are less related to junk food (without saying that coffee is good for health, right?). Premium chicken and Angus beef also shows MCD’s interest in offering higher quality products and gradually move forward to a “higher standard” fast food chain. In my opinion, the menu evolution must match consumers’ new taste in order to prevent a sales decrease. So far, MCD has been able to show that they can adapt quite fast to the industry even though they are a huge mammoth in the fast food sector.

When you compare McDonald’s to its main competitors (Burger King, Wendy’s (WEN) and Yum! (YUM)), you can tell that MCD is still in the driver’s seat for a few years at least. Especially when you consider that MCD sales are about 10 times greater than Burger King’s. Profit margin is also another place where MCD is dominating (over 20% as compared to 10% for Yum!).

Final Thoughts

I’d say that MCD is definitely a great stock to hold due to its leadership position coupled with a great dividend growth history. The biggest “negative” point I can see at this stage it’s MCD P/E ratio. At 18 or so, it’s far from being a deal. On the other hand, if the company continues to raise its dividend by double digits and show consistent sales growth, it might be enough to be part of my portfolio! I currently don’t hold MCD stocks but it will definitely be on my watch list for future trades.

Source: McDonald's: Surprising Capital Appreciation Over Last Decade