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Stock Analysis: McDonald's

McDonald’s Corporation (MCD), together with its subsidiaries, operates as a worldwide foodservice retailer. It franchises and operates McDonald’s restaurants that offer various food items, soft drinks, coffee, and other beverages. The company is member of the S&P 500, Dow Jones Industrials Average and the S&P Dividend Aristocrats indexes. McDonald’s has paid uninterrupted dividends on its common stock since 1976 and increased payments to common shareholders every year for 34 years.

The most recent dividend increase was in September 2010, when the Board of Directors approved an 11% increase to 61 cents/share. The major competitors of McDonald’s include Yum! Brands (YUM) and Starbucks (SBUX).

Over the past decade this dividend growth stock has delivered an annualized total return of 13.80% to its loyal shareholders.

The company has managed to deliver an increase in EPS of 15.50% per year since 2001. Analysts expect McDonald’s to earn $5.09 per share in 2011 and $5.55 per share in 2012. This would be a nice increase from the $4.58/share the company earned in 2010. On average the company has managed to repurchase 2.20% of its stock annually over the past decade. I expect future earnings per share growth to average 10% per year over the next decade.

The company has been able to increase in return on equity from the high teens in early 2000s to over 30% over the past three years. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 26.50% per year since 2000, which is much higher than the growth in EPS. Future dividend growth would likely average 10% per year.

A 26% growth in distributions translates into the dividend payment doubling almost every three years. If we look at historical data, going as far back as 1979, we see that McDonald’s has actually managed to double its dividend every fouryears on average.

Over the past decade the dividend payout ratio has increased from 18% in 2001 to 49% in 2010. This has mostly been as a result of dividend growth being faster than earnings growth. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently McDonald’s fits my entry criteria trading at 16.60 times earnings, yields 3.10% and has a sustainable dividend payout. I would consider adding to my position in the stock subject to availability of funds.

Full Disclosure: Long MCD and YUM

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