McDonald’s – A Wonderful Company

Living as frugally as I do, honestly I don’t visit McDonald’s very often. I decided early this morning I was going to write about McD’s and decided to visit a McDonald’s location close to my work today for lunch (for research and yummy goodness). I ordered a #1, which for anyone living under a rock is a Big Mac meal. This brand has such recognition and exposure, I bet there are very few people that don’t already know that fact. Just one reason it’s such a great company. I sat down to eat my lunch next to a father and his young son. The child was eating a Happy Meal and he was actually proclaiming to his father “This is my favorite restaurant in the whole world!”. That kind of stuff gets me pretty excited about a business. I know some people blather on about separating emotion from investing, but I like the old story about Peter Lynch shopping with his wife and discovering a pantyhose brand to invest in after his wife proclaimed how great the product was. A great product is usually produced by a wonderful company.

A little about the company, per Morningstar:

McDonald’s generates revenue through company-owned restaurants, franchise royalties, and licensing pacts. Restaurants offer a uniform value-priced menu, with some regional variations. As of December 2010, there were 32,700 locations in 117 countries, including 26,300 operated by franchisees/affiliates and 6,400 company units. 

Of course, that tells us little about McDonald’s. This is a global icon. It has a large moat around it’s business and it’s revenues absolutely crush any comparable food chain. It’s brand and logo can be recognized by almost anyone, anywhere. I think they have a wonderful brand, a great image and a solid product lineup.

McDonald’s financial positions are very strong. Let’s take a look.

Earnings per share have more than doubled since 2005. EPS has grown by an annual clip of 20.75%.

Earnings Per Share ($)
1Q 2Q 3Q 4Q Year
2010 1.00 1.13 1.29 1.16 4.58
2009 0.87 0.98 1.15 1.11 4.11
2008 0.81 1.04 1.05 0.87 3.76
2007 0.63 -0.59 0.83 1.06 1.93
2006 0.46 0.56 0.67 0.61 2.30
2005 0.56 0.42 0.58 0.48 2.04

Revenue growth is also impressive. Revenue has grown by 2.94% per year.

Revenue (Million $)
1Q 2Q 3Q 4Q Year
2010 5,610 5,946 6,305 6,214 24,075
2009 5,077 5,647 6,047 5,973 22,745
2008 5,615 6,075 6,267 5,565 23,522
2007 5,293 5,839 5,901 5,754 22,787
2006 4,914 5,367 5,671 5,634 21,586
2005 4,803 5,096 5,327 5,235 20,460

Dividend growth is also very wonderful with this company. Obviously this is the juicy part of the investment and this is what we, the shareholders, get in return for our faithful investment into the company. It’s money returned to use for reinvestment or other capital allocation as we see fit.

Dividend growth has averaged 39% over the last 6 years, but slowed from 2009-2010 with a 10.2% increase.

Dividend Per Year ($ Per Share)
2010 2.26
2009 2.05
2008 1.62
2007 1.50
2006 1.00
2005  .67

Excellent, excellent, excellent growth in this area. However, it should be noted that the payout ratio has also increased during this amazing run. I expect slower, but generous increases going forward. Commodities across the board are increasing and even McDonald’s is not immune to an increase in input and foot costs. They are however, one of the biggest players in the world and do have immense pricing power and economies of scale from which to spread out the impact. The consumer will eventually see some of these costs passed on.

Overall, I love McDonald’s. I think they are second to none when it comes to the fast food arena. I love the makeovers and the “upscale” lounges they now employ in a number of restaurants worldwide. The coffee and smoothie section as part of the McCafe brand has caught on well. They are expanding on healthy choices. They are expanding the footprint in emerging markets. I see a lot of growth still ahead for McDonald’s.

The company does have risks. The company does not have the healthiest portfolio of food offerings. There is some backlash over that, including a suit in California over the inclusion of toys in Happy Meals. The economy is still fragile and commodities are starting to increase across the board. Higher input costs mean higher prices for the consumer, which could lead to people going elsewhere. I really don’t believe this will happen, as my opinion is that McDonald’s offers some of the best tasting and highest quality fast food around. I think only Wendy’s offers food of comparable quality, but their lounges are often not as upscale and the food is usually much higher in price.

My opinion is that this is a wonderful businesses. It is trading at an attractive 16.74 P/E ratio with an entry yield of 3.18%. I think anything below $82.44 is an attractive price point. Although it is not the best value on the market right now I do think it’s a wonderful business with an attractive entry yield, a substantial dividend growth history and a wonderful lineup of products. It has one of the world’s most recognizable brands and has an extremely large moat around it.

I am long MCD.

Thanks for reading.

Comments

  1. says

    Great analysis. I too am long MCD, and I think it’s a great company. I think the health worry is overblown. I hear people talk about eating healthy all the time, yet all the McDonalds I see are always packed.

    I worry more about rising food costs and decreasing margins. But if anyone has the buying power to curb that, it’s MCD.

  2. says

    @The Dividend Pig

    Thanks for stopping by. I agree with you. I stopped by McD’s for lunch this past Friday for the first time in a long time…and it was absolutely packed. I actually happened to grab the last booth available. I agree that a few talking heads have the health concerns overblown. I also believe McD’s is doing a great job at countering these concerns with the healthy offerings.

    Rising food costs and squeezed margins are a concern. I really believe due to buying power McD’s will fair better than other businesses. In fact, rising food costs may help them as I believe they have the power to combat these costs better than Yum, Wendy’s and some other players. They may be able to hold on to the dollar menu longer than other chains. We will see.

    Thanks again for reading.

  3. says

    Nice write up on one of my favorite dividend companies. The company has innovated in its menus since 2003, and has focused more on same store organic growth rather than mindless expansion. The recession didn’t really affect MCD as many consumers traded down from eating out at other more expensive restaurants to fast food places like MCD.

    I also like YUM for its exposure to China, although it’s valuation is a little rich for my taste.

    Good luck with hitting your portfolio income goals!

  4. says

    Dividend Growth Investor,

    Thanks for stopping by! I agree that same store growth and innovation has been a big success story for MCD.

    I appreciate the well wishes. I just wanted to say that your blog is the first dividend growth blog I read and is what started me on my path, so I thank you!

  5. says

    I have a website where I research stocks under five dollars. I have many years of experience with these type of stocks. I find that the best measurement of how undervalued a stock is is the price to sales ratio of a companies stock. The price to sales ratio is the market cap of a companies stock compared to the amount of sales the company does on an annual bases. A good example of a company with a low price to sales ratio is carrols restaurant group the company has a market cap of just 240 million dollars but does over 800 million dollars in annual sales the company is solidly profitable. In other words the price that the market is valuing the company at is 240 million dollars this is only about one fourth of what the company does in annual sales 800 million dollars. The stock currently trades at about 11 collars a share under the symbol {TAST} I think the stock could get to 55.00 dollars a share over the next five years. I base this on the current net profit margin of around 1.75% or 14 million dollars on sales of 800 hundred million dollars. If the companies sales were to increase by 50% or 400 million dollars to 1.2 billion dollars over the next five years. And if the companies net profit margin were to expand from 1.75% to 5% or 60 million dollars over the next five years. Than if the companies stock increased in price to where it was trading at a price earnings ratio of 20 this would put the stock at 55 dollars a share. This may seem to be a somewhat optimistic scenario but not really that much. There are many stocks that trade at much higher price earnings ratios when they become popular than 20 times earnings. I find that companies like carrols restaurant group are very rare. I also find that companies that have low price to sales ratios that are profitable or of decent quality tend to become takeover targets or get taken private by private equity firms or the management of the company or other companies in the same business. A good example of a popular stock with a very high price earnings ratios is whole foods market it trades at 35 times annual earnings. If anyone has any question as of the validity of the information presented here any stock broker financial planner or CPA that knows how to value stocks will confirm everything presented here.

  6. says

    Their strong revenue will continue to grow in my opinion even with the confrontation of inflated food prices. I honestly think the convenience and brand of Mcdonald’s will trump any economic disaster. I know with the recent rise of “eating healthy” people have shunned MCD, but truth be told its much more frugal to eat MCD than to buy organic.

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