First Look at DOW 30 Component McDonalds (MCD).

Today I take a first look at Dow 30 component McDonalds (MCD).  Micky Dee’s is a phenomenal dividend growers and sports an above average 3.18 dividend yield.  However, the stock is speculatively priced at the current price.  Their balance sheet could definitely be improved.  Read on to see how I came to these conclusions.

McDonalds (MCD)

Price: $88.16 (two days ago)

Shares: 1.02 billion

Market capitalization: $89.59 billion

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What does the company do: 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 March 2012, there were 33,500 locations in 119 countries, including 27,100 franchisees/affiliates units and 6,400 company units.

Morningstar’s take: McDonald’s continues to thrive despite an increasingly challenging environment for restaurant operators. Although we doubt the firm can duplicate the almost 1,500 basis points of operating margin expansion it posted during the last five years, we are optimistic that it is capable of generating superior returns on invested capital over an extended horizon. Our confidence stems from unrivaled scale advantages, an incredibly strong brand, and ample international growth opportunities. We don’t expect these qualities to abate anytime soon, thus earning McDonald’s the widest economic moat in the restaurant category.

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Bonds: $11.1 billion outstanding

Times interest earned: McDonalds earned 22.5 times it interest expenses in 2011.  They earned $5.503 billion in 2011 and paid $493 million in interest expenses.  McDonalds’ bonds are not a threat to their dividend.

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Preferred stock: none.

DIVIDEND RECORD: McDonalds has been a mind blowing dividend grower.  In 1987, they paid a $0.02 quarterly dividend.  By 1999 McDonalds grew the quarterly dividend to $0.05.  They switched to growing annual dividends until 2008.  McDonalds has grown their dividend to $0.70 quarterly.  Therefore, their annual dividend has grown from $0.08 annually to $2.80 today.  That is a 3,400% straight line gain over 25 years or 136% straight line annual dividend growth.  That it some of the highest dividend growth I’ve ever seen.

Dividend: $0.70 quarterly

Dividend yield: 3.18% ($2.80 annual dividend / $88.16 share price)  This is around double the S&P500 average.  McDonalds becomes a 6% yielding high dividend stock at a price of $46.66.

Dividend payout: 52% using 2011 EPS of $5.35 –OR- 72% using average adjusted earning power of $3.90.  I seriously doubt they will be able to grow their dividend as much as they did over the last 25 years without huge earnings increases in a highly competitive market.

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EARNING POWER: $3.90 @ 1.02 billion shares

(earnings adjusted for changes in capitalization – typically share buybacks and/or additional shares created)

EPS

Net income

Shares

Adjusted EPS

2005

$2.04

$2,602 M

1,274 M

$2.55

2006

$2.83

$3,544 M

1,252 M

$3.47

2007

$1.98

$2,395 M

1,212 M

$2.35

2008

$3.76

$4,313 M

1,146 M

$4.23

2009

$4.11

$4,551 M

1,107 M

$4.46

2010

$4.58

$4,946 M

1,080 M

$4.85

2011

$5.27

$5,503 M

1,045 M

$5.40

Seven year average adjusted earnings per share is $3.90

Consider contrarian buying below $31.20 (8 times average adjusted EPS)

Consider value buying below $46.80 (12 times average adjusted EPS)

Consider speculative selling above $78.00 (20 times average adjusted EPS)

McDonalds (MCD) is currently trading at 22.6 times average adjusted EPS.  This is stock is speculatively priced.

BALANCE SHEET – Very high price to book value ratios.  Current ratios and quick ratios show some weakness.

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Book value per share: $14.37 ($14.661 B equity / 1.02 B shares)

Price to book value ratio: 6.13 (under 1.0 is good)  New McDonalds investors are paying a large premium for the company’s equity.  Investors are paying $6.13 for each $1.00 of equity.

Tangible book value per share: $11.71 (equity – $2.219 B in goodwill / 1.02 shares)

Price to tangible book value: 7.53 (near 1.0 is good) Investors are paying $7.53 for each $1.00 of tangible book value.

Current ratio: 1.17 latest quarter (over 2.0 is good) ($4.255 B current assets / $3.646 B current liabilities)

Quick ratio: 0.63 latest quarter (over 1.0 is good) ($2.289 B in cash / $3.646 B current liabilities)

Debt to equity ratio: 0.82 (lower is better)

Percentage of total assets in plant, property, and equipment: 69.91% (the higher the better) other percentages of total assets are 12.76% in current assets, 9.17% other long term assets, and 8.16% in intangibles.

Working capital trend: Averaging $1 billion in working capital in the past five years.

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CONCLUSION – McDonalds weathered the Panic of 2008 – 2009 fairly well compared to the rest of the Dow 30 and the S&P500 stocks.  McDonalds’ pre-crisis peak was $65.67 in August of 2008.  Most big companies saw their stock drop 40% – 50% during the height of the panic.  However, McDonalds only suffered a 20% decline.  Its post crisis bottom formed around $52.12 in March 2009.    Why do I provide all this history?  Because you should be aware how the stock performed during the most recent crisis so you can be prepared for the next crisis.  McDonalds has had quite a run since the post-crisis lows up to just over $100 at the start of 2012.  McDonalds is still speculatively priced at 22.6 times average adjusted earnings.

McDonalds has been a phenomenal dividend grower for the past 25 years.  The yield is not high, but it is nearly double the S&P 500 average at 3.2%.  I like McDonalds below $46.80 for price appreciation and dividend yield.

Their balance sheet is not strong due to high price to book value ratios and low current/quick ratios.

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DISCLOSURE – I don’t own McDonalds (MCD).

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Published in: on June 8, 2012 at 1:56 pm  Leave a Comment  

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