Stock Analysis - McDonald’s Corporation (NYSE:MCD)
3 July 2007The next S&P 500 Dividend Aristocrat to take the Dividends Matter stage is McDonald’s Corporation which trades on the NYSE under the symbol MCD.
Company Profile:
From Yahoo Finance
McDonald’s Corporation operates as a foodservice retailer worldwide. It operates and franchises McDonald’s restaurants, which offer various food items, and soft drinks and other beverages. As of December 31, 2006, it operated approximately 31,045 restaurants in 118 countries.
McDonald’s has a market cap of $61.34B.
Company Fundamentals:
Return on invested capital is steady and sitting right around 10%. McDonald’s return on equity numbers look better. The 10 year average is 17.32% and the 5 year average is 16.72%. Last year’s ROE was 18.30%. This difference between the ROIC and the ROE is attributed to McDonald’s successfully using leverage. Their total debt is almost 36% of their capital.
Equity growth rate has been steady. Over the 10 year period, the equity growth rate is 7.76%. Over 5 years, it is 11.57% and last year’s growth rate was 7.11%. The 7% number seems to have some consistency.
Earnings per share growth rate has been sporadic with lows of negative 14% to highs of 34%. Over the 10 year period, the average is 7.09%. In line with the equity growth rate which makes sense.
Sales growth rate has been quite consistent over the whole 10 year period at 7.31%. However, last year’s sales growth rate was 5.50%.
The company fundamentals show this company chugging along at a nice, steady rate.
Dividend Fundamentals:
McDonald’s has a current dividend yield of 1.97%. Although that is higher than the S&P 500 dividend yield of 1.88%, it is lower than the DJIA yield of 2.25%. And overall, this yield seems low since we can find other company’s paying yields in the 4% range.
Although McDonald’s has a low dividend yield, they have had amazing dividend growth! The dividend growth rate over 10 years is 22.06%. But it gets better. Over 5 years, it is 36.61% and over 3 years it is 34.26%. And last year, it was 49.25%! This is a high dividend grower (HDG)! And I love HDGs!
Now, we must be cautious. With all this exuberance, we can’t forget to check the dividend payout ratio. And it has seen a very steep climb from a low of 14% to today’s current 42.55%. This has been a very steep increase. And it is not bad. After all, if McDonald’s management feels that it is better to pay the shareholders because they don’t see other opportunities, then that is great. McDonald’s is a mature business.
Cash flow growth rates have not kept up with this tremendous dividend growth. Over the last 5 years, during this massive dividend growth, the cash flow growth rate has been 11.63%.
Valuation Models:
Over the last 5 years, the average high dividend yield has been 2.54%. Using that as our required yield, the model price would be $39.40. As of close on Friday, the price was $50.76 which means a premium of 28.84%.
The Graham number works out to $26.93 which means a premium of 88.49%.
Using the discounted present value method, I used the following numbers:
- future EPS growth rate of 7.76% (the equity growth rate over the 10 year period)
- future P/E of 15.51 (which is the rule of thumb of using 2 times the future EPS growth rate)
- sustainable dividend yield of 2.54% (the 5 year average yield)
- future dividend growth rate of 15% (there is no way McDonald’s can keep growing their dividend at the current pace)
With these estimates, the model price is $32.18 which means a premium of 57.72%.
See all my calculations here.
Conclusion:
McDonald’s has been a high dividend grower over the last decade, and especially over the last 5 years. And these are the kind of stocks that make your portfolio superior!
However, I would say that this stock is currently overpriced and I would wait for a pullback before adding McDonald’s to your portfolio.
What are your opinions on McDonald’s? Worth adding to your portfolio?
Full Disclosure: I do not own any shares in McDonald’s Corporation (MCD)
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