Recent Buy

buyBuy on the dips, right? That’s what they always say, yet it’s emotionally and philosophically difficult to do. When a stock is falling in price the natural reaction is to ask oneself “what’s wrong here?”. That’s understandable. What I try to do is instead of asking myself that question, I ask myself “what is everyone else getting wrong here?”. Instead of picking a stock apart and finding all the right reasons for the price falling, I look for all the right reasons to purchase the stock and take advantage of other people’s fear. Be greedy when others are fearful and fearful when others are greedy. The great Warren Buffett is wise, indeed. Well, today one of my holdings dipped and I purchased.

As part of my Recent Buy series, I try to let my readers know of any equities I purchase soon after the transaction is completed. This is just one way I try to document my progress toward early retirement and financial independence.

I purchased 12 shares of McDonald’s Corporation (MCD) on 3/8/12 for $96.91 per share. I don’t think I need to introduce the McDonald’s business plan or exactly what they do. I’ll instead leave the qualitative qualities out of the discussion today. It’s an extremely dominant business, and even being as frugal as I am I do occasionally indulge in their products. The frappe’s are delicious! I’ll leave it at that.

MCD isn’t exactly a steal at current prices, but I think it’s a fair price to pay for a quality company. I’ve been holding my relatively small MCD position as it rose above $100 per share as I never felt it was grossly overvalued, but I didn’t see much of an opportunity to add to my existing 14 shares. Today’s dip of over 3% was due to a slight sales growth miss based on analysts expectations. I’ll take that dip as my cue. I received an entry yield on my price of 2.89%, and this purchase will add $33.60 to my annual dividend total based on the current payout of $0.70 per share per quarter. The current P/E ratio is a hefty 18.40, which is fairly strong but probably pretty fair for the growth that MCD still has ahead of it. The balance sheet is fairly strong, with a debt/equity ratio of 0.8 and the 5-year dividend growth rate is a whopping 20.4%, though I do expect that to slow to high single digits for the foreseeable future. This purchase brings my total MCD holdings to 26 shares.

Best of all, MCD has underperformed the S&P 500 this year, going -3.35% YTD while the S&P 500 is up 8.60% on the year. That difference is very attractive to me, especially after the strong 2011 MCD had. Again, MCD isn’t a steal at current prices, but I think today’s dip offers the long-term investor a chance to initiate a small position or add to an existing one. Certainly not a dip to back the truck up on, and that’s why I didn’t go crazy with it.

I still have enough capital to make one more purchase this month and will wait a little bit for another dip on something attractive. I planned on making larger purchases this month after my strong savings rate in February, but unfortunately I had a higher than planned tax bill that required some of my capital.

I still own 25 positions, as I was already long MCD.

Some analyst opinions on MCD:

*Morningstar currently rates MCD as a 3/5 star valuation.
*S&P currently rates MCD as a 5/5 star Strong Buy.

I’ll update my Freedom Fund in early April to reflect my recent purchase.

What are you buying?

Thanks for reading.

Photo Credit: Stuart Miles/FreeDigitalPhotos.net

Comments

  1. says

    Hi DM,

    Nice post and a nice buy. I’m going to pick up some MCD Japan stock with my next infusion of capital funds. MCD is very popular here and they are always very packed.

    I’m just curious how you calculated additional your yearly dividend. I saw .7×4=2.8×14=39.2 Are you taking out taxes or your commission?

    Keep up the good work! You’re quite the inspiration.

    • says

      The Stoic Investor,

      I agree, it’s tough to go wrong with a solid blue chip like MCD. Although not a steal, it’s still a solid long-term investment in my view.

      Best wishes!

  2. Anonymous says

    I added 10 shares of MCD yesterday also. We have 2 MCD here in Williamsport and they are always busy.

    • says

      Anonymous,

      Glad to see another buyer of MCD here. I could have doubled up on my purchase, but I feel that it’s still not undervalued but probably pretty close to fairly valued at current prices. Though, that is nice because there is such a lack of value in the market right now.

      I have a McDonald’s right up the road from where I work and it’s almost always packed. Good stuff! Although, I will say that they recently built a Five Guys Burgers joint across the street and that’s starting to take away some of the traffic from ol’ Mickey D’s. I’m watching that.

      Take care!

  3. Anonymous says

    Just paid off a car loan, (debt free age 25, engineering hard work in school + frugality pays off fast :) else i would have invested in MCD as well today. I went to visit relatives in Tokyo, MCD was packed in every single one i walked by. Construction was booming there and unemployment rates are very low there because of that.

    I couldn’t splurge in Tokyo like they could 30 years ago when the yen was 300 to the $1, it was 75 yen to the $1 back in Nov. Not it’s almost 81 yen.

    • says

      Anonymous,

      Great to see you living debt free. Breaking the chains of debt slavery is key if you want to attain financial independence.

      I’m really glad to hear that MCD is doing so well in Japan. That certainly bodes well for future growth in Asia.

      Best wishes!

  4. says

    McDonalds I’m lovin it! Great pick up on a down day. I agree buying the dips. McDonald’s has a PEG ratio of 1.82, a forward Price to Earnings ratio of 15.81, Price to Book ratio of 7.09 and a projected EPS growth rate of 10.3% for next year.I believe McDonald’s will continue its climb and reach a target price of $105.88 by December 31st. Plus, McDonald’s has a 2.8% dividend yield which is icing on the cake. LONG MCD.

    • says

      jdavis4982,

      Your numbers suggest that MCD is fairly valued, and I would agree with that. I think while MCD’s stock price takes a breather this is a good time to initiate a small position or add to an existing one. If it slows from here, that would be an excellent time to average down.

      Good luck to you as a fellow MCD shareholder!

    • says

      The Dividend Addict,

      Thanks for stopping by. Hope all is well.

      Interesting thoughts there. I haven’t heard or read anything like that, so it’ll be interesting to see if talk of a split comes up at the end of the year.

      Take care!

  5. says

    Just from what I’ve read on the various stock forums, websites, etc.. and it seems McD’s has a history of wanting to keep their stock “afforable” for everyone. No real insider info, just have a hunch from all I’ve read and their actual stock split history. Could be wrong, just my personal belief that they will.

  6. Anonymous says

    I sold MCD at around $100 about two weeks ago. Bought 50 shares at $97 the other day, and 50 more below that today. If it gets back to $100 in a week or two, I’ll probably sell and book the quick gain.

    • says

      Anonymous,

      Nice trading there. I typically don’t engage in trading quite like that, as I feel I’m not smart enough to do that and I also don’t want commission fees and taxes to eat into my gains. If you can make it work for you then more power to you.

      Keep us updated on your strategy and how it’s working.

      Take care!

  7. says

    Nice buy! MCD is already my second-largest holding (35 shares), but I would consider buying more if the price dropped further and I had cash available. It does trade at a bit of a premium, but it’s a high-quality stock, so I don’t mind it in this case.

    • says

      deedubs,

      You’re a buying machine lately. Good stuff!

      If it drops further from here, to the $90 level then I would consider adding again to my MCD position. MCD and KO are both stocks that ran away from me after I purchased them and didn’t really get a chance to add to my positions. Now they’re both a bit strongly valued, but I’ll take the small dips as an opportunity.

      Best wishes!

  8. Shawn says

    I’ve got a strike price of $92 on MCD. I hope it hits that mark so I can own some of this great company.

    • says

      Shawn,

      $92 would be a nice price to pay for MCD. I think anything approaching $90 in this market will be difficult without a general market sell-off, but I would certainly welcome either of those situations.

      Let’s hope MCD continues to fall!

      Best wishes.

  9. Anonymous says

    I have been following you for a while now. Great posts!! I too bought 24 shares of MD…..it actually was my first US stock purchase..I have been heavy in Canadian stocks. I didn’t realize how much you get burned on the conversion fees! Anyways great posts. My wife and I are too trying to get our expenses covered by dividends….we are 29 and we get about 6,000 a year in dividends….we are working hard to get up there!!

    • says

      Martin,

      Thanks for following the blog. It’s much appreciated and I’m glad you enjoy it!

      You’re only 29 and already receiving $6k a year in dividends? Wow, that’s phenomenal. At that rate you’ll be FI well before me. Keep up the fantastic work!

      Best wishes.

    • says

      Martin,

      Thanks for following the blog. It’s much appreciated and I’m glad you enjoy it!

      You’re only 29 and already receiving $6k a year in dividends? Wow, that’s phenomenal. At that rate you’ll be FI well before me. Keep up the fantastic work!

      Best wishes.

    • Anonymous says

      Hello! Yes, we are doing ok. We have the same goals financially as you. I own a company and wife works gov job so we are putting all our money left over to pay off our mortgage in 4years and then all cash left to investing……that is our plan!

      Anyways, I love following your posts and will share with friends.

      Cheers,

      Martin

  10. Jon says

    DM,
    Great pick up on a dip….MCD will continue to be a solid holding. I’ve got PETS on my radar right now due to the fact I’d like to add another high yielder. What are your thoughts on this stock? Hope you have a great weekend!

    • says

      Jon,

      Thanks for stopping by.

      To be honest, I don’t currently follow PETS at all so I can’t really give you any thoughts or information on it. I may do a little research on it and get back to you.

      Take care!

  11. Anonymous says

    Just saw that you live in Sarasota. My wife and I just spent 2 wk in Siesta Key. Beautiful beach!

    Just wondered where you get your ideas for what to buy?

    Bill from Williamsport

  12. Anonymous says

    Hey DM,

    You have mentioned a girlfriend in a couple of your posts in the past. I was wondering if she too is involved in investing in dividend paying stocks? Maybe she is the one who introduced you to this lifestyle? or was it difficult to sell her on the idea of saving and investing? Or maybe she just completely does her own thing and she doesn’t share the same beliefs as far as being frugal and trying to earn a passive income???

    • says

      Anonymous,

      My girlfriend does not share a love for investing, but she is fairly frugal…and almost as frugal as I am. She does have a more “live in the moment” attitude on life, which can certainly be refreshing at times. She keeps me grounded and allows me to retain perspective on not only trying my best to achieve my long-term goals but also to remember that tomorrow is not promised. She lives a fairly frugal day-to-day life, but isn’t afraid to splurge if she thinks something will make her happy.

      Hope that helps. Best wishes!

  13. Anonymous says

    Mantra,

    MCD is definitely a good dividend income stock. But is MCD still a dividend growth stock? The 5 year sales growth is 5.3%, the 5 year dividend growth rate is 20.4%, and the payout ratio is 53%. Any trend (such as dividend growth) can continue until it hits a limit. The way I see it, the limit is the payout ratio. A healthy payout ratio for a company is between 50 and 60%. MCD is essentially at the payout ratio limit. I would expect future dividend growth to be limited to the growth in sales.

    This is a general issue for the dividend growth investment style. Lately, I have been looking more at stocks which may have a lower yield, but a good dividend growth rate and a relatively low payout ratio to allow room for growth. If I had the cash, I would be buying SPLS right now.

    Ken

    • says

      Hi Ken,

      Since like many blue-chips, MCD uses the rest of its free cash flow after dividends to reduce its number of shares outstanding, EPS has grown faster than net income.

      Dividend growth is not particularly limited by company-wide sales, although that of course is an indirect limiting factor. Instead, the dividend growth rate is limited by per-share income growth or per-share free cash flow growth.

      For MCD, those growth rates are currently above 5%.

    • says

      Ken,

      I think Dividend Monk answered your question better than I could have. SPLS is an interesting choice, but not really a dividend growth stock. It looks cheap, fundamentally, so that could be a deep value play. The yield is a little low for me, especially coupled with the fact that the dividend was held static just a few years ago and the growth hasn’t been that great since.

      Monk,

      Thanks for answering. As always, your wisdom and attention to detail is always much appreciated!

      Take care!

    • says

      Compounding Income,

      Thanks for stopping by.

      Well, you know as I said MCD isn’t a steal at current prices. If I already had a large position with MCD I would have probably waited for a bigger dip, but from a personal allocation viewpoint it made sense to buy at these levels and add to my meager holdings.

      I love me an egg mcmuffin too!!

      Always good to trade ideas. Keep in touch!

  14. Lazy Investor says

    Bought 42 shares at 100$ a couple weeks ago. I missed the recent dip but I don’t care.
    Holding on … forever!
    I can’t see why it would go down any time soon.

    • says

      Lazy Investor,

      This wouldn’t happen to be Derek Foster, would it? Just kidding!

      I’m with you on holding MCD forever. I don’t have any plans on ever selling MCD, but if it becomes grossly overvalued or cuts the dividend I’ll be out. I find the latter scenario unlikely, but the former certainly possible as the market run-up continues. Let’s hope for further dips and attractive entry points!

      Best wishes!

  15. Bo says

    Hi DM

    Great buy, MCD was actually my first stock I bought, I’m planning on holding it forever if it keeps raising its dividends!

    I have new capital to invest and was looking at WAG, it has an amazing 1yr, 3yr, 5yr and 10yr dividend growthrate and seems cheap trading at a P/E of 11.3. What are your thoughts on this one? Is it on your watch list?

    Take care,

    Bo

    • says

      Bo,

      Great job on holding on to MCD. That one will keep on paying you to be a loyal shareholder. I’m lovin’ it!

      I’m not totally sold on WAG. I can’t think of any kind of competitive advantage it has in a highly competitive pharmacy industry. It looks cheap, and the dividend growth has been stellar. I think if I was to initiate a position in WAG, it would likely be a small one. Let me know if you go long on it!

      Take care.

  16. says

    I have heard enough about Mcdonald’s. Im not suggesting that Mcdonald’s is not and has pretty much been a great company for a long time. I used to work for a small company that had 90% of their business with Mcdonald’s That being said. I believe that most investors focus on just one percent of the companies listed on the new york stock exchange or nasdaq. A stock does not have to be a household name to be a great investment. Their are many high quality stocks that are safe investments and of very good quality. But you will rarly hear much talk about them at a cocktail party.

  17. says

    I really like Mcdonalds, but not at their current price. I know it’s a great company with a rock solid business and moat. I’m really excited about their expansion globally and I will be purchasing stocks during the next market crash.

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