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McDonald's (MCD) is one of the world's leading food service retailers, with over 33,000 restaurants operating in 119 countries. This includes about 27,000 franchised units and 6,000 company units. The current projected dividend yield is 3.16%.

(click to enlarge)MCD Chart

MCD data by YCharts

Over the last decade McDonald's has orchestrated an impressive turnaround, its stock rising from a low in 2003 of around $13 per share to a high of nearly $100 per share at the beginning of 2012. Currently McDonald's trades at around $88 per share. The dividend growth over this time-frame has been equally impressive, and is displayed below.

YearDividendGrowth
2002

$0.235

4.44%
2003$0.4070.21%
2004$0.5537.50%
2005$0.6721.82%
2006$1.0049.25%
2007$1.5050.00%
2008$1.6258.33%
2009$2.0526.15%
2010$2.2610.24%
2011$2.5311.95%

McDonald's dividend has grown by a factor of 10 since 2002, and the company has been paying a dividend since 1976. This kind of dividend growth, along with the appreciation of the stock price, is a dividend investor's dream. Let's take a look at the payout ratios, calculated as a fraction of the free cash flow.

YearFree Cash Flow (Mil $)Float (Mil Shares)Payout Ratio
2002$3381,28289.13%
2003$1,5861,27732.21%
2004$2,3351,27430.01%
2005$2,7301,27431.27%
2006$2,6001,25248.15%
2007$2,9301,21262.05%
2008$3,7821,14649.24%
2009$3,7991,10759.74%
2010$4,2061,08058.03%
2011$4,4201,04559.82%

The payout ratio has been around 60% in the past few years, which is a sustainable situation.

Valuation

I will use the Dividend Discount Model to put an estimated value on the company. This model assumes that the value of a company is purely the sum of all future dividends discounted back today. This is a reasonable valuation method if you are a dividend investor. The discount rate should be your required rate of return, and I will use a discount rate of 8%, which is roughly the long-term growth rate of the market as a whole. I will assume that the dividend will grow by 10% next year, and then let that growth rate decay over 20 years to a perpetual growth rate of 3%, as per the growth table below.

YearDividend Growth Rate
201210%
20139.65%
20149.3%
20158.95%
20168.6%
20178.25%
20187.9%
20197.55%
20207.2%
20216.85%
20226.50%
20236.15%
20245.8%
20255.45%
20265.1%
20274.75%
20284.4%
20294.05%
20303.7%
20313.35%

Using these parameters I arrive at a fair value estimate of $90.27 per share of McDonald's.

Conclusion

It's important that you don't overpay for a dividend stock. Just a few months ago when McDonald's was trading close to $100 per share I believe it was too expensive to justify. However, since declining to $88 per share the stock has become more and more attractive and is now trading below my fair value estimate. At this price McDonald's offers a great value for a dividend investor. With a yield over 3%, a history of high dividend growth, and a dominant position in its industry, McDonald's would make a great addition to a dividend-focused portfolio.

Source: McDonald's Is A Dividend Investor's Dream