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. Since MCD's tangible book value is not meaningful, a Graham number can not be calculated. When also considering the NPV MMA Differential, the stock is trading at a 60.0% premium to its calculated fair value of $157.5. 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 1.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The company has paid a cash dividend to shareholders every year since 1976 and has increased its dividend payments for 44 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
The NPV MMA Diff. of the $82 is below the $500 target I look for in a stock that has increased dividends as long as MCD has. If MCD grows its dividend at 4.2% per year, it will take 8 years to equal a MMA yielding an estimated 20-year average rate of 2.74%.
Peers: The company’s peer group includes: Yum! Brands, Inc. (YUM) with a 1.6% yield, Starbucks Corp. (SBUX) with a 1.8% yield and The Wendy's Company (WEN) with a 2.3% yield.
Conclusion: MCD did not earn any Stars in the Fair Value section, earned one Star in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of one Star. This quantitatively ranks MCD as a 1-Star Very Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $172.40 before MCD's NPV MMA Differential increased to the $500 minimum that I look for in a stock with 44 years of consecutive dividend increases. At that price the stock would yield 3.1%.
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 7.9%. This dividend growth rate is higher than the 4.2% used in this analysis, thus no margin of safety. MCD has a risk rating of 1.75 which classifies it as a Medium 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. As a result of its strong price appreciation over the years, MCD was one of the largest positions in my dividend growth portfolio; in 2016 I trimmed my position back to 5%. MCD is trading above my calculated fair value price of $157.50, its debt to total capital is above my maximum. 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 (5.3% of my Dividend Growth Portfolio).
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