Linked here is a detailed quantitative analysis of McDonald's Corporation (NYSE:MCD). Below are some highlights from the above linked analysis:
Company Description: McDonald's Corporation is the largest fast-food restaurant company in the world, with nearly 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. The stock is trading at a 17.0% premium to its calculated fair value of $81.88. 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. It 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 37 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 $320 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 3.8% per year, it will take 3 years to equal a MMA yielding an estimated 20-year average rate of 3.68%. MCD earned a check for the Key Metric 'Years to >MMA' since its 3 years is less than the 5 year target.
Memberships and Peers: MCD is a member of the S&P 500, a Dividend Aristocrat, a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company’s peer group includes: Yum! Brands, Inc. (NYSE:YUM) with a 2.0% yield, Starbucks Corp. (NASDAQ:SBUX) with a 1.5% yield and The Wendy's Company (NASDAQ:WEN) with a 2.2% 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 $85.99 before MCD's NPV MMA Differential increased to the $500 minimum that I look for in a stock with 37 years of consecutive dividend increases. At that price the stock would yield 3.8%.
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 5.0%. This dividend growth rate is higher than the 3.8% used in this analysis, thus providing no 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 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 should continue to grow its market share, albeit at a slower pace due to a sputtering global economy in Europe and Asia and the millennial generation who prefer healthier foods. The company is trying to offset weakness in the domestic market with growth in overseas markets. It is opening of its first restaurant in Vietnam, and has excellent long-term growth opportunities in China and other emerging markets where living standards are on the rise.
The stock continues to be one of the largest positions in my dividend growth portfolio. Its strong price appreciation over the years has made it one of my top performing holdings. MCD is trading above my calculated fair value price of $81.88 and its free cash flow payout and debt to total capital are slightly above my maximums. For now, I will wait for a more opportune time to add 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 (4.8% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.
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