Tuesday, October 19, 2010

A Fast Food Company With A Juicy Dividend Yield

McDonald’s is the most popular fast food restaurant in the industry. Everyone goes to McDonald’s. Whether it’s the Big Mac, the milkshakes, salads, crispy chicken wraps, ice cream cones or the fries; customers flock to McDonald’s by the millions. Its drive thrus are often packed as customers drive in to get an early morning McMuffin or a late night snack. McDonald’s is an earnings giant with nearly $24 billion dollars in annual revenue.

The margins are incredible at McDonald’s. McDonald’s has a 20% profit margin, 40% gross margin and an operating margin approaching 30%. That’s better than competitors Yum Brands and Burger King. The king of fast food has been able to grow earnings at a remarkable 19% clip per annum. McDonald’s has made efficient use of its assets and capital earning a 15% return on assets and 36% return on equity.

Although McDonald’s has all of these things going for it; the stock is not cheap. The stock currently trades at just under $75 per share. This values the company at 16.5 times earnings. This is not a high multiple based on past growth but is high compared to future forecasts. McDonald’s is projected to grow earnings at a 10% clip over the next few years. That means the stocks trades at 1.6 time projected earnings growth.

The stock is currently paying a dividend of $2.44 per share. That's a very solid yield of 3.1%. There is no reason to run out and buy shares of McDonald's right now. The stock currently looks expensive to me at $77 a share. Patient investors may get a chance to buy shares of the fast food king on a pullback.


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