Forecasting The Future Return On A Stock: McDonald's

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Winning Formula

McDonald's Corporation (NYSE:MCD) is the largest hamburger restaurant in the world serving over 68 million customers daily in 119 countries around the world. Recently, McDonald's stock sold at a 52 week high of over $102 and since has fallen to below $90 per share. To help investors forecast MCD's potential return from a $90 stock price, I will use it in this example of how to forecast future returns on stock investments.

My basic formula for forecasting future returns, assuming a fixed market multiple, is:

Total Return = Earnings Growth + Dividend Yield

MCD's earnings growth for the next five years is forecast to be 9.7%. The current dividend yield is 3.1% based on its annualized dividend payment of $2.80 divided by a $90 stock price (3.1%=$2.80/$90). Assuming the market multiple of MCD stays fixed at its current 16.9 times earnings, the forecast total return of MCD would be 12.8%; calculated by adding its 9.7% forecasted earnings growth with its 3.1% current yield.

If investing were as simple as this basic formula, all you would need to do is add the earnings growth and dividend yield on all stocks and buy the one with the highest forecast total return. Obviously, there is more to investing than this basic formula or we would all be rich. Notice the assumption that the market multiple stays fixed. Ah, there's the catch. We need to forecast the future market multiple of the stock because an increasing market multiple will increase our future total return and a decreasing market multiple will lower our future total return. Therefore, a precise formula for forecasting future returns is:

Total Return = Earnings Growth + Dividend Yield + Multiple Change %

The market multiple is calculated by taking the current price of the stock and dividing by its earnings

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“The winning formula for success in investing is owning the entire stock market through an index fund and then doing nothing.”  - John BogleMy “Winning Formula” is to invest in the entire market of high-quality high-dividend yielding stocks through Ticker:VYM and then spend the dividends in retirement.  This is what John Bogle calls “Mailbox Money”.

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