McDonald's: Using European Uncertainty To Your Advantage

| About: McDonald's Corporation (MCD)

With the release of May's employment numbers and the ongoing soap opera that is Europe, markets across the world have sold off substantially since May 1st. For patient long term investors the uncertainty is now presenting some attractive entry points into well run dominant businesses. The focus of this article will be on McDonald's (NYSE:MCD) a global quick serve restaurant chain. MCD offers a compelling valuation at current levels. I will present three key points to illustrate the case for the company.

US Europe APMEA other countries Total (in millions)

2011

$8,529

$10,886

$6,019

$1,572

$27,006

2010

$8,112

$9,569

$5,066

$1,328

$24,075

2009

$7,944

$9,274

$4,337

$1,190

$22,745

Click to enlarge

Financial info provided by McDonalds.

The first point to consider is MCD consistent ability to increase sales even when faced with difficult economic conditions. As we can see from the chart above MCD has a global footprint and isn't dependent on any one geographical area for the bulk of their sales. Even in the mist of all the uncertainty emanating from Europe sales have consistently rose in that market. Interestingly, Europe is now MCD largest region as measured by total sales dollars.

To delve further into the European picture for MCD I will present some excerpts from the 1st quarter conference call. The entire transcript can be seen here courtesy of Seeking Alpha. The following excerpts are from Chief Operating Officer Don Thompson from the most recent conference call. "In the U.S., comparable sales increased 8.9% for the quarter and operating income rose 10%. Europe's comparable sales were up 5% and operating income grew 8% in constant currencies. And in Asia/Pacific, Middle East and Africa, or what we call APMEA, comp sales grew 5.5% and operating income was up 7% in constant currencies. Our momentum is continuing into April, with global comparable sales growth expected to be about 4%."

The result that MCD was able to achieve speaks to its excellence in execution and dominant position in the quick service restaurant segment. MCD was able to increase sales across the board even in Europe which is suffering from a widespread slowdown. MCD management used promotional items aimed at a specific customer base to increase sales.

"In the area of menu, Europe has led the way with limited-time offers that we call promotional food events. This quarter, France featured 2 premium beef sandwiches, the McFarmer and McTimber, which resonated with customers. In the U.K., strong promotions around the Big Tasty beef sandwich and our 20-piece McNuggets ShareBox exceeded our expectations, as did Germany's re-hit of the 1955 burger."

The second point to consider is MCD consistent and ever rising dividend. MCD has managed to pay dividends every year since 1976 which speaks well to its enduring business model.

2011

Actual Dividend Amount

Dividend Adjusted for Split

Record Date

Payable Date

1.

0.70

0.70

Dec 1, 2011

Dec 15, 2011

2.

0.61

0.61

Sep 1, 2011

Sep 16, 2011

3.

0.61

0.61

Jun 1, 2011

Jun 15, 2011

4.

0.61

0.61

Mar 1, 2011

Mar 15, 2011

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Click to enlarge

2010

Actual Dividend Amount

Dividend Adjusted for Split

Record Date

Payable Date

1.

0.61

0.61

Dec 1, 2010

Dec 15, 2010

2.

0.55

0.55

Sep 1, 2010

Sep 16, 2010

3.

0.55

0.55

Jun 1, 2010

Jun 15, 2010

4.

0.55

0.55

Mar 1, 2010

Mar 15, 2010

Click to enlarge
Click to enlarge

2009

Actual Dividend Amount

Dividend Adjusted for Split

Record Date

Payable Date

1.

0.55

0.55

Dec 1, 2009

Dec 15, 2009

2.

0.50

0.50

Sep 1, 2009

Sep 16, 2009

3.

0.50

0.50

Jun 8, 2009

Jun 22, 2009

4.

0.50

0.50

Mar 2, 2009

Mar 16, 2009

Click to enlarge
Click to enlarge

2008

Actual Dividend Amount

Dividend Adjusted for Split

Record Date

Payable Date

1.

0.50

0.50

Dec 1, 2008

Dec 15, 2008

2.

0.375

0.375

Sep 2, 2008

Sep 16, 2008

3.

0.375

0.375

Jun 9, 2008

Jun 23, 2008

4.

0.375

0.375

Mar 3, 2008

Mar 17, 2008

Click to enlarge
Click to enlarge

2000-2007

Actual Dividend Amount

Dividend Adjusted for Split

Record Date

Payable Date

1.

1.50

1.50

Nov 15, 2007

Dec 3, 2007

2.

1.00

1.00

Nov 15, 2006

Dec 1, 2006

3.

0.67

0.67

Nov 15, 2005

Dec 1, 2005

4.

0.55

0.55

Nov 15, 2004

Dec 1, 2004

5.

0.40

0.40

Nov 14, 2003

Dec 1, 2003

6.

0.235

0.235

Nov 15, 2002

Dec 2, 2002

7.

0.225

0.225

Nov 15, 2001

Dec 3, 2001

8.

0.215

0.215

Nov 15, 2000

Click to enlarge
Click to enlarge

Dividend info courtesy of McDonalds

As we can see from the chart above the dividend has grown every year at a very consistent rate. At a current price of $89 a share the dividend yield currently works out to 3.15% with an expected increase at some point this year. The current yield is far superior to a 10 year US Treasury bond (currently 1.5%). MCD is also committed to increasing the dividend as evidenced by the following excerpt attributed to Chief Operating Officer Don Thompson from the most recent conference call. "Our long-term average annual targets remain intact, with sales growth of 3% to 5%, operating income growth of 6% to 7% and return on incrementally invested capital in the high-teens. Our intent remains to return all of our cash flow, after reinvesting in the business, to investors through a combination of dividends and share repurchases over the long term. In fact, we returned $1.5 billion to shareholders through dividends and share repurchases this quarter.

MCD Shares Outstanding ChartClick to enlarge
(Click to enlarge)

MCD Shares Outstanding data by YCharts

The third point that makes MCD intuiting is its growth prospects. The following excerpts are from Chief Operating Officer Don Thompson from the most recent conference call. "APMEA remains a region of tremendous growth and opportunity. We remain excited about our future potential in this growing region as we build on our menu and value and extend the convenience of our brand through drive-thru, delivery, kiosks and extended hours, as well as new restaurant development."

As MCD expands its geographical footprint in Asia it is not inconceivable that in the near future sales from that region will overtake U.S. sales offering a shareholder the potential for significant capital gains. MCD expansion plans for this year as per Chief Financial Officer Pete Bensen from the most recent conference call "In 2012, we expect to open more than 1,300 new restaurants, including 450 in Latin America, Japan and other markets, where we invest no capital."

In summary MCD is a wide moat well run restaurant chain that offers an investor a compelling blend of income plus capital gains potential. The company is well managed and should continue to generate an acceptable return going forward. The current global uncertainty has managed to push the company from a high of $102 to roughly $88 offering an attractive entry point for a long term growth and income investor.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MCD over the next 72 hours.

Disclaimer: This article is for educational purposes only and not actual investment advise. Thank you for reading and I look forward to your comments.