Monday, December 13, 2010

Stock Analysis: McDonald's Corporation (MCD)

Linked here is a detailed quantitative analysis of McDonald's Corporation (MCD). Below are some highlights from the above linked analysis:

Company Description: McDonald's Corporation is the largest fast-food restaurant company in the world, with about 32,500 restaurants in 117 countries.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

MCD is trading at a discount to only 2.) above. The stock is trading at a 14.0% discount to its calculated fair value of $90.22. MCD earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:

1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%

MCD earned two Stars in this section for 2.) and 3.) above. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. MCD earned a Star for having an acceptable score in at least two of the four Key Metrics measured. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (2000-2003, 2001-2004, 2002-2005, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1976 and has increased its dividend payments for 34 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.
2. Years to > MMA

MCD earned a Star in this section for its NPV MMA Diff. of the $7,077. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as MCD has. If MCD grows its dividend at 15.0% per year, it will take 2 years to equal a MMA yielding an estimated 20-year average rate of 3.4%. MCD earned a check for the Key Metric 'Years to >MMA' since its 2 years is less than the 5 year target.

Memberships and Peers: MCD is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. The company's peer group includes: Yum! Brands, Inc. (YUM) with a 2.0% yield, Starbucks Corp. (SBUX) with a 1.6% yield and Wendy's/Arby's Group, Inc. (WEN) with a 1.7% yield.

Conclusion: MCD earned one Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks MCD as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $205.31 before MCD's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 34 years of consecutive dividend increases. At that price the stock would yield 1.10%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 5.9%. This dividend growth rate is well below the 15.0% used in this analysis, thus providing a significant margin of safety. MCD has a risk rating of 1.50 which classifies it as a low risk stock.

MCD is the dominant brand in the global fast food industry. In addition, the company enjoys unrivaled scale advantages and substantial international growth opportunities. MCD notes on their website that since going public in 1965, it has paid twelve stock splits and an investment of $2,250 in 100 shares at that time, grew to 74,360 shares worth over $4.6 million as of year-end market close on December 31, 2009. This stock continues to be one of the great success stories for dividend growth investors and is found in virtually all dividend income based portfolios. I will continue to add to my position in MCD when it is trading below my buy price, currently $90.22, and as my allocation allows. For additional information, including the stock’s dividend history, please refer to its data page.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.


Full Disclosure: At the time of this writing, I was long in MCD (3.9% of my Income Portfolio). See a list of all my income holdings here.

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2 comments:

  1. Link to quantitative analysis does not work.

    Thanks

    ReplyDelete
  2. It should be working now.

    Best Wishes,
    D4L

    ReplyDelete

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