This article originally appeared on The DIV-Net November 9, 2009.
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. Its restaurants serve a varied, yet limited, value-priced menu in more than 100 countries around the world.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
- Avg. High Yield Price
- 20-Year DCF Price
- Avg. P/E Price
- Graham Number
MCD is trading at a discount to 1.), 2.) and 3.) above. The stock is trading at a 13.2% discount to its calculated fair value of $71.11. 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:
- Free Cash Flow Payout
- Debt To Total Capital
- Key Metrics
- Dividend Growth Rate
- Years of Div. Growth
- Rolling 4-yr Div. > 15%
MCD earned one Star in this section for 3.) above. The stock 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 (1999-2002, 2000-2003, 2001-2004, 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 33 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:
- NPV MMA Diff.
- Years to > MMA
MCD earned a Star in this section for its NPV MMA Diff. of the $18,427. 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 16.9% per year, it will take 2 years to equal a MMA yielding an estimated 20-year average rate of 3.9%. MCD earned a check for the Key Metric ‘Years to >MMA’ since its 2 years is less than the 5 year target.
Other: MCD is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index.
Conclusion: MCD earned one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks MCD as a 3 Star-Hold.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $209.72 before MCD’s NPV MMA Differential decreased to the $500 that I like to see for a stock with 33 years of consecutive dividend increases. At that price the stock would yield 0.98%.
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 5.5%. This dividend growth rate is significantly less than the 16.9% used in this analysis, thus providing a margin of safety. MCD has a risk rating of 1.50 which classifies it as a low risk stock.
MCD is a stock that I have liked for many years. It has shown strong dividend growth over the last 10 years. However, its debt level and free cash flow payout have crept up to levels above what I am comfortable with. Although the stock is trading well below my buy price of $71.11, I will wait for MCD’s dividend fundamentals to improve before adding to my position. 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 (2.8% of my Income Portfolio). What are your thoughts on MCD?