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You deserve a break today with MCD

 

 

Now that the summer pullback has started, defensive stocks are in vogue. One of the best of bread in the consumer services sector is MCD. Not only do they have a large lead in US markets, they also are challenging their major competition in Asia—YUM and SBUX. From the standpoint of resistance to price depreciation and persistance in dividend increase, MCD is one of the best in the consumer services sector.

 

Projected earnings (First Call) for the period 2010-2013 are as follows:

 

Year

Annual Earnings Per Share

2010

4.61

2011

5.11

2012

5.59

2013

6.18

 

The percentage growth for next year is 9.39%. The five year expected annual earnings per share growth rate is 16.8% vs. projected industry growth rate of 12.6%. The current yield is 2.97% with a trailing p/e of 17.5. MCD is a Dividend Champion with 34 consecutive years of dividend increases. It has a 5 year annual dividend growth rate of 27.5%. The yield + 5 year dividend growth rate more than justify the 17.5 current p/e. I believe the stock is currently fairly priced.

 

During this summer's market pullback, stocks will be on sale and I believe, like the healthcare and telecommunications sectors, consumer cyclical stocks will fall in price approaching 4% yield. For MCD to do that it will take a price of $61. However, MCD historically announces their dividend increase around the first day of December. Therefore, depending upon one's anticipation of that dividend increase, it would be prudent to purchase MCD at a higher price based on current $2.44 dividend, say 3.5% rather than 4% yield. A price of $69.71 would not be bad for this stock, especially when the market is falling. One look at the price chart during this past crash in 2008, shows that this stock should hold up during the next crash.

 

http://finance.yahoo.com/echarts?s=MCD+Interactive#chart1:symbol=mcd;range=my;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

 

I remember when the first McDonald’s Golden Arches opened in our town back in the 1950s. The 15 cent hamburger put all the soda fountain 50s burgers to shame and the lines grew into the streets. It may happen in Asia today.