Company Description: McDonald's Corporation is the largest fast-food restaurant company in the world, with about 35,000 restaurants in 119 countries.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these 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 premium to all four valuations above. When also considering the NPV MMA Differential, the stock is trading at a 7.7% premium to its calculated fair value of $111.76. MCD did not earn any Stars in this section.
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 one Star in this section for 3.) above. MCD earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1976 and has increased its dividend payments for 39 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) or Treasury bond? 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 $535. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as MCD has. The stock's current yield of 2.96% exceeds the 2.19% estimated 20-year average MMA rate.
Peers: The company’s peer group includes: Yum! Brands, Inc. (YUM) with a 2.9% yield, Starbucks Corp. (SBUX) with a 1.5% yield and The Wendy's Company (WEN) with a 2.6% yield.
Conclusion: MCD did not earn any Stars 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 two Stars. This quantitatively ranks MCD as a 2-Star Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $123.58 before MCD's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 39 years of consecutive dividend increases. At that price the stock would yield 2.9%.
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 3.2%. This dividend growth rate is slightly lower than the 3.5% used in this analysis, thus a negligible margin of safety. MCD has a risk rating of 1.25 which classifies it as a Low risk stock.
MCD is the dominant brand in the increasingly challenging global fast food industry. The company enjoys unrivaled scale advantages and international growth opportunities, particularly in Asia, the Middle East and Africa. The company has faced several challenges including slow economic growth in Europe and Asia, satisfying the Millennial generation who prefer healthier foods, competitors aggressive price promotions, exchange rate volatility and negative press. CEO Steve Easterbrook has put in place a turnaround plan that includes refranchising 4,000 locations by the end of 2018 and $500 million in net annual SG&A reductions.
As a result of its strong price appreciation over the years, MCD was the largest positions in my dividend growth portfolio; I recently trimmed my position back to 5%. MCD is trading above my calculated fair value price of $111.76, its debt to total capital and its free cash flow payout are above my maximums. For now, I will wait for a more opportune time before adding to my position.
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 (4.9% of my Dividend Growth Portfolio). See a list of all my Dividend Growth Portfolio holdings here.
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Tags: MCD, YUM, SBUX, WEN,
