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In the learning to fish series, we provide investors with suggested guidelines for choosing a potential candidate and one candidate is selected as our play of choice. We provide reasons for this choice and in doing so hope to impart some understanding to those who are new to the field of dividend investing. The suggested guidelines can be accessed here - "our suggested guidelines when searching for new investment ideas." These are not absolute rules; they are just suggestions and there are always exceptions to the rule. The goal is to try to satisfy as many of them as possible.

Reasons to like McDonald's Corp (NYSE:MCD):

  • A strong levered free cash flow of $3.8 billion
  • A strong 5 year dividend growth rate of 20%
  • A true divided champion, it has consecutively raised dividends for 35 years
  • A great return for the past 5 years of 100%
  • Net income increased from $4.5 billion in 2009 to $5.5 billion in 2011
  • Sales surged from 22.7 billion in 2009 to $27 billion in 2011
  • Cash flow per share increased from $5.21 in 2009 to $6.76 in 2011
  • Annual EPS before NRI surged from $1.93 in 2009 to $5.27 in 2011
  • A good payout ratio of 52%
  • Year over year projected growth rates of 7.87% and 10.8% for 2012 and 2014 3 respectively
  • A decent yield of 3.10
  • An excellent interest coverage ratio of 15.33 and a good quick ratio of 1.22
  • A 5 year ROE average of 31%
  • A projected 3-5 year EPS estimated growth rate of 9.9%
  • A free cash flow yield of 4.77%
  • $100K invested for 10 years would have grown to a stunning $643K. If the dividends were reinvested the rate of return would be much higher

Company: McDonald's Corp

Levered free cash = 3.8 Billion

Growth

  1. Net Income ($mil) 12/2011 = 5503
  2. Net Income ($mil) 12/2010 = 4946
  3. Net Income ($mil) 12/2009 = 4551
  1. EBITDA ($mil) 12/2011 = 9920
  2. EBITDA ($mil) 12/2010 = 8727
  3. EBITDA ($mil) 12/2009 = 8176
  4. Cash Flow ($/share) 12/2011 = 6.76
  5. Cash Flow ($/share) 12/2010 = 5.9
  6. Cash Flow ($/share) 12/2009 = 5.21
  1. Sales ($mil) 12/2011 = 27006
  2. Sales ($mil) 12/2010 = 24075
  3. Sales ($mil) 12/2009 = 22745
  1. Annual EPS before NRI 12/2007 = 1.93
  2. Annual EPS before NRI 12/2008 = 3.66
  3. Annual EPS before NRI 12/2009 = 3.98
  4. Annual EPS before NRI 12/2010 = 4.59
  5. Annual EPS before NRI 12/2011 = 5.27

Dividend history

  1. Dividend Yield = 3.10
  2. Dividend Yield 5 Year Average = 2.94
  3. Dividend 5 year Growth = 20.48
  4. Payout Ratio = 0.52
  5. Payout Ratio 5 Year Average = 0.5

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 9.93
  2. 5 Year History EPS Growth 12/2011 = 15.54
  3. ROE 5 Year Average 12/2011 = 31.57
  4. Current Ratio 12/2011 = 1.17
  5. Quick Ratio = 1.22
  6. Interest Coverage Quarterly = 15.33

Suggested strategy

On a test of 90, investors who are bullish on the stock could sell puts with strikes in the 83-85 ranges as the support is pretty strong in this zone.

Company: Peabody Energy (NYSE:BTU)

Basic Key ratios

  1. Percentage Held by Insiders = 0.33
  2. Relative Strength 52 weeks = 16
  3. Dividend 5-year Growth = 10.01
  4. Cash Flow 5-year Average = 4.11
  5. Dividend Yield 5-Year Average = 0.65

Growth

  1. Net Income ($mil) 12/2011 = 958
  2. Net Income ($mil) 12/2010 = 774
  3. Net Income ($mil) 12/2009 = 448
  4. Net Income Reported Quarterly ($mil) = 173
  1. EBITDA ($mil) 12/2011 = 2095
  2. EBITDA ($mil) 12/2010 = 1801
  3. EBITDA ($mil) 12/2009 = 1231
  4. Annual Net Income this Yr/ Net Income last Yr = 23.73
  5. Cash Flow ($/share) 12/2011 = 5.97
  6. Cash Flow ($/share) 12/2010 = 4.68
  7. Cash Flow ($/share) 12/2009 = 3.43
  1. Sales ($mil) 12/2011 = 7974
  2. Sales ($mil) 12/2010 = 6860
  3. Sales ($mil) 12/2009 = 6012
  1. Annual EPS before NRI 12/2007 = 1.56
  2. Annual EPS before NRI 12/2008 = 3.63
  3. Annual EPS before NRI 12/2009 = 1.92
  4. Annual EPS before NRI 12/2010 = 3.05
  5. Annual EPS before NRI 12/2011 = 4.17

Dividend history

  1. Dividend Yield = 1.40
  2. Dividend Yield 5 Year Average 12/2011 = 0.65
  3. Dividend 5 year Growth 12/2011 = 10.01

Dividend sustainability

  1. Payout Ratio 09/2011 = 0.09
  2. Payout Ratio 5 Year Average 06/2011 = 0.11
  3. Change in Payout Ratio = -0.02

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 10.27
  2. 5 Year History EPS Growth 12/2011 = 16.38
  3. ROE 5 Year Average 12/2011 = 21.18
  4. Return on Investment 12/2011 = 10.88
  5. Debt/Total Cap 5 Year Average 12/2011 = 45.26
  6. Current Ratio 12/2011 = 1.86
  7. Current Ratio 5 Year Average = 1.49
  8. Quick Ratio = 1.4
  9. Cash Ratio = 0.9
  10. Interest Coverage Quarterly = 3.51

Company: Ares Cap Cp (NASDAQ:ARCC)

Growth

  1. Net Income ($mil) 12/2011 = 319
  2. Net Income ($mil) 12/2010 = 692
  3. Net Income ($mil) 12/2009 = 203
  1. EBITDA ($mil) 12/2011 = 437
  2. EBITDA ($mil) 12/2010 = 318
  3. EBITDA ($mil) 12/2009 = 163
  4. Cash Flow ($/share) 12/2011 = 1.68
  5. Cash Flow ($/share) 12/2010 = 1.41
  6. Cash Flow ($/share) 12/2009 = 1.3
  1. Sales ($mil) 12/2011 = 634
  2. Sales ($mil) 12/2010 = 483
  3. Sales ($mil) 12/2009 = 245
  1. Annual EPS before NRI 12/2007 = 1.43
  2. Annual EPS before NRI 12/2008 = 1.42
  3. Annual EPS before NRI 12/2009 = 1.35
  4. Annual EPS before NRI 12/2010 = 1.43
  5. Annual EPS before NRI 12/2011 = 1.56

Dividend history

  1. Dividend Yield = 9.70
  2. Dividend Yield 5 Year Average = 13.00
  3. Dividend 5 year Growth = - 2.65

Dividend sustainability

  1. Payout Ratio 06/2011 = 0.92
  2. Payout Ratio 5 Year Average 12/2011 = 1.08

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 11.5
  2. EPS Growth Quarterly(1)/Q(-3) = -154.84
  3. ROE 5 Year Average 12/2011 = 10.03
  1. Current Ratio 06/2011 = 1.3
  2. Current Ratio 5 Year Average = 1.94
  3. Quick Ratio = 1.32
  4. Cash Ratio = 0.73
  5. Interest Coverage Quarterly = 3.91

The markets are extremely oversold, and could potentially mount a strong relief rally. However, we still believe there is more downside to this market before a multi month bottom takes hold. Long-term investors can use strong pullbacks to slowly start deploying money into long-term investments. A great way to get into a stock at a price of your choosing is to sell puts at strikes you would not mind owning the stock at. Investors looking for investment ideas might find these articles to be of interest - General Electric: An Option Strategy That Could Potentially triple your yield and 3M Company Among 3 Prospective Dividend And 2 Growth Plays.

Disclaimer

This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is imperative that you do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies - let the buyer beware.

Source: McDonald's 1 Of 3 Interesting Long-Term Prospects To Reflect On

Additional disclosure: EPS and Price Vs industry charts obtained from zacks.com. A major portion of the historical data used in this article was obtained from zacks.com.