Company Description: McDonald's Corporation is the largest fast-food restaurant company in the world, with about 32,500 restaurants in 117 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 two 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 discount to only 2.) above. The stock is trading at a 14.3% discount to its calculated fair value of $95.49. 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 two 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. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive four-year period over the last 10 years (2001-2004, 2002-2005, 2003-2006, etc.) I consider this a key metric since dividends will double every five 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 35 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 two 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 $6,669. 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 15.0% per year, it will take three years to equal a MMA yielding an estimated 20-year average rate of 4.%. MCD earned a check for the Key Metric 'Years to >MMA' since its three years is less than the five-year target.
Memberships and Peers: MCD is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. The company's peer group includes: Yum! Brands, Inc. (NYSE:YUM) with a 1.8% yield, Starbucks Corp. (NASDAQ:SBUX) with a 1.4% yield and Wendy's/Arby's Group, Inc. (NASDAQ:WEN) with a 1.6% yield.
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 stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $197.51 before MCD's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 35 years of consecutive dividend increases. At that price the stock would yield 1.24%.
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 6.8%. This dividend growth rate is well below the 15.0% used in this analysis, providing a significant margin of safety. MCD has a risk rating of 1.50 which classifies it as a Low risk stock.
MCD is the dominant brand in the global fast food industry. In addition, the company enjoys unrivaled scale advantages and substantial international growth opportunities. After updating MCD for first quarter 2011 financials, it slipped one level to a 3-Star stock as a result of its debt to total capital going slightly above 45%. However, I still consider the stock to be one of the premier dividend growth stocks and will continue to add to my position in MCD when it is trading below my fair value price of $95.49, and as my allocation allows.
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 (6.3% of my Income Portfolio). See a list of all my my income holdings here.
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