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McDonald's: Buy, Sell Or Hold?

Passive Income Pursuit profile picture
Passive Income Pursuit


  • McDonald's Corporation has increased dividends for 40 consecutive years marking them as a Dividend Champion.
  • McDonald's Corporation pioneered the use of the franchise business model for restaurants.
  • Great companies aren't always a great investment. Valuation is key.
  • Shares are currently trading at $114.09 giving investors a current yield of 3.30%.

McDonald's Corporation (NYSE:MCD) is synonymous with successful restaurants and even developed the business model that just about every other restaurant company uses: the franchise. McDonald's is now one of the largest restaurant companies in the world with over 36,000 locations across the globe.

The franchise business model that McDonald's employs is very straightforward. McDonald's owns the restaurant, charges the franchisee rent and gets a percentage of revenues from each franchised restaurant. That's how over 80% of McDonald's locations worldwide are run.

McDonald's is currently in the midst of a turnaround plan to get the company back on a growth track. The business has struggled in recent years as consumers have desired healthier options forcing McDonald's to shift direction to get customers back to their restaurants.

However, just because McDonald's has been a wonderful investment in the past doesn't necessarily mean that they will do well in the future. The problem is that investing is all about the relation between the share price and the value of the underlying business. A great company can be a bad investment if the valuation is out of whack. Let's examine what kind of return potential McDonald's has at the current price of $114.09.

Dividend History

One of the first factors I look at before investing in a company is their dividend history. That's a quick screen that allows investors to narrow down the universe of high quality companies. The longer the streak of growing dividends the better. This doesn't necessarily mean that every company you find will be great; however, I'd say that there's a much higher likelihood of finding one here if you could only look at one metric.

McDonald's has done and excellent job rewarding shareholders with higher dividends. In fact, just last month they gave owners a 5.6% pay raise and

This article was written by

Passive Income Pursuit profile picture
I started a dividend growth investment strategy a few years ago and am aggressively growing my portfolio to churn out enough dividends to reach financial independence.

Analyst’s Disclosure: I am/we are long MCD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I am not a financial professional. Please consult an investment advisor and do your own due diligence prior to investing. Investing involves risks. All thoughts/ideas presented in this article are the opinions of the author and should not be taken as investment advice.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (14)

I think MCD is on a mission to streamline and automate its restaurants. I think you will see a big capital investment being made in automation to reduce the number of personnel required to operate the stores and make them more manager friendly.
six profile picture
I did sell MCD... at $128... actually, I "traded" my MCD for PM at just under $99... the trade netted me much more dividend income, from 2.8% to 4.2%... I paid no taxes, as the trade was in a qualified account... and while I was not seeking a capital gain, the traded netted a $53 per share profit.

The caveat is, in my personal portfolio I run a very concentrated portfolio of 5 to 10 stocks. Right now, I hold 5 stocks. When you hold concentrated positions trades like this offer more boost to the portfolio.

The more stocks you own, the less sense it makes to attempt trades such as this...

When I sell a stock, I ask myself 3 questions... Why am I selling? What am I getting? How will the transaction impact my investment goals?

I don't sell for ONE reason... I sell for a confluence of reasons...

MCD was over priced at $128... simple Graham calculations showed they needed to grow EPS by 7% to support the $130 price... and in this low growth world that seems a stretch to me...

MCD did offer a nice capital gain for me of $53 per share...

But what is really important is that I had a viable option to move the money to... As a DGI, I never let cash sit idle for long because that earns me no dividends. PM offered a much larger dividend, 4.2% vs. 2.8%... PM only needs 4% growth to support a $98 share price.

Most importantly, a 4% dividend alone will meet my financial goals...

Finally, I consider what I expect from the market in terms of returns, potential for a market correction and macro economic concerns...

But lets review some math to see how a trade like this works...

$100,000 MCD @ 2.8% pays $2800 per year... @ $128 per share 781 shares
$100,000 PM @ 4.2% pays $4200 per year... @ $98 per share 1020 per share

(whole shares only for example)

Right off the bat, MCD needs at 1.4% capital appreciation over and above PM just to match PM... that alone is a significant hurdle.

But what should resonate with any DGI, is that if they consider the market fully price or overpriced (a popular view and one I share to some degree) and one recognizes that stocks most often move in tandem as market itself moves then advantage of a higher dividend is even more appealing. If the market declines or stagnates then the power of a higher dividend will be even more powerful.

Assume that the market declines 20%... and both PM and MCD decline 20%...

MCD $102.4 PM $78.4...

(simplistic example price is static for entire year)

MCD $2800 buys 27 shares PM $4200 buys 53 shares

Total share count MCD 808 PM 1073

Then the market returns to it's previous level and MCD and PM both return to their former share price of MCD $128 PM $98...

Total $ MCD $103,424 PM $106,277

Again the more stocks you hold, the less this helps... but if you, like I, believe in concentration then using basic arithmetic and logic will lead to some trades.
RoseNose profile picture
Very solid reasoning and I agree with waiting for it to slide lower to add , as I also have a position.
Thanks for the article. Rose :)) Happy Investing.
"Looking at just the most recent 10 years of data the average dividend growth rates work out as such...."

Your 1-year, 3-year, 5-year, and 10-year dividend growth rates are all incorrect. I have no idea where they came from, but just looking at the list which is above them, you can see that the dividend growth rate for the last 3 years has been almost exactly 5% per year.
Passive Income Pursuit profile picture

It's pretty simple actually just take the average of the last 10 values for each. I guess my lead in sentence might have been a bit misleading since the first 10-year growth rate actually encompasses the dividend payment from 20 years ago. Although the numbers do average out to those I stated in the article.
JeroldLarson profile picture
$MCD has great international growth opportunities. Indian, Chinese, South American, and African markets are prime for $MCD expansion.


20/20Dividends profile picture
Never a sell.....hold.... and buy on the dips....
Passive Income Pursuit profile picture
20/20 Dividends,

For my own flavor no company is a never sell although the valuation needs to be stretched for me to start considering trimming or selling assuming that's my only reason for doing so. I hear, or rather read, quite often people saying that companies are a never sell and I just don't understand that logic. If say for some reason MCD's share price increased to $500 per share tomorrow despite no news coming out suggesting absolutely no change in the business, why would you not sell? I understand the draw of buy/hold/never sell as long as the valuations are within reason. If they get stretched to where your future returns are significantly impacted then why not take advantage of the markets over-exuberance? Just my $0.02.
six profile picture

it is said that the New York Times employs a special search tool to catch the words "always" and "never" because there is ALMOST no situation that warrants their use.

Intellectual laziness and narrow mindedness is the reason for investing maxims such as "never sell". Not real logic and reason.

Anyone that says the "never" sell is grandstanding. Of course, it would be nice to buy a stock, collect dividends and pass it to the next generation... but that is simply not possible for most people. And as your example suggests, certainly not logical in certain situations.

The commeter most famous for proclaiming they "never" sell, also never explains that his investments have a low cost basis and as they are in a non-qualified account, they have a high tax liability. In this situation, holding makes much more sense than it does in a qualified account with no tax consequences for selling.

Beyond that, most investors will need or want to sell a stock to generate income at some point. In fact, one of the best reason to choose a stock portfolio over fund is the ability to sell a particular stock to generate income. Investors should not be made to feel that they are violating some tenant of DGI by selling shares of stock.

Finally, to you point, anyone that would not sell MCD at $500 would be cutting of their nose to spite their face. It is a moronic idea to suggest otherwise. But then this is crowd sourced information and you truly get what you pay for sometimes.
Passive Income Pursuit profile picture

At this level I agree. I have to say I thought about selling earlier this year in the high $120's/low $130's but backed away from it at the time.
RoseNose profile picture
Perfect comment.
rcm438 profile picture
well said. I question new mgmts understanding and commitment to the core business. seems like a focus on financial mumbo jumbo vs attention to the business. beware
You can only put lipstick on the pig for so long. If you look at the SOURCE of MCD revenue, you gain a somewhat different perspective. MCD's revenue comes from ownership of the unit facilities, and royalty revenue from its franchisees. At the core of this model is the return to the franchisee. It is what drives unit expansion, revenue growth, etc. Unit level net profits have been declining for years in most chain restaurants. The public push for higher wages, increased competition inside and outside the burger segment, and higher food costs for beef in particular, have put pressure on individual owners. Even when MCD is willing to fund new unit growth, the shrinking profitability of individual units is affecting franchisee motivation. It is new unit development in growth areas (new neighborhoods in population growth markets) that drives the MCD growth machine. The only positive sign I see in the near term is in lower beef costs. Whether that is enough to get MCD back into a unit growth mode is unknown. For now, MCD is just cannibalizing itself by increasing debt to fund increasing dividends. It cannot be sustained without major improvements at the unit operating level.
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