This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

McDonald's Trading at a Tasty Price

I have devoted many of these columns to stocks that offer promise on the basis of their potential to appreciate and their valuation metrics (which often come with short-term volatility) or their healthy income stream and price stability in a choppy stock market.

Today we focus on a company that is attractive on both counts. McDonald's (MCD - Get Report) is a good example of an all-weather stock. We believe it offers investors not only reasonable appreciation potential but also an attractive income level and the stability of an iconic and well-run business.

McDonald's is the premier global fast-food restaurateur. The company primarily franchises, but it also operates more than 34,000 restaurants globally under the McDonald's brand name. During the most recent quarter, McDonald's reported weaker than expected earnings of $1.32 per share, compared with $1.38 consensus. Furthermore, July same-store comp sales also disappointed with flat results vs. expectations of a 2.7% increase.

The current weakness is entirely due to broad global macro weakness seen throughout Europe and Asia. Investors are still a bit cautious on the stock, and that has led to a 10%-plus correction in the stock price. Nevertheless, management is still positive on company execution and has maintained long-term guidance of 7% to 8% revenue growth and 8% to 10% earnings growth.

From a valuation perspective, McDonald's, though not cheap, is reasonable. The stock is trading at 16.75x 2012's EPS estimate of $5.41 and 15.5x 2013's EPS estimate of $5.85. Historically, the stock has traded for greater than 16x earnings. McDonald's has a strong A++ investment-grade credit rating and a 53% payout ratio. For the past decade, the company has consistently increased revenue 8% per year and earnings 12.5% per year.

From an income perspective, McDonald's looks surprisingly strong. The shares currently have a 3.1% dividend yield, and we expect that to increase to 3.4% to 3.5% when the company reviews and raises its dividend later in September. Impressively, the company has raised its dividend every year for the past 10 years. We expect that McDonald's will continue to raise its dividend in line with its long-term growth rate at 8% to 10% per year because of continued global expansion, margin improvements and stock buybacks. (While dividend growth has been even greater than that during the past five years, we expect the pace to slow and to more closely track earnings growth.)

Bottom line, investors are buying one of the world's pre-eminent brands with good growth prospects, strong financials and a very attractive, growing dividend at a price that looks reasonable compared with its historical norm.

If you're looking to supersize your investment, MCD should be a good choice.
At the time of publication, Matrix clients in Matrix's Dividend Equity strategies owned and continue to buy MCD. David Katz does not own MCD. There are no other conflicts of interest.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free

Markets

Chart of I:DJI
DOW 15,973.84 +313.66 2.00%
S&P 500 1,864.78 +35.70 1.95%
NASDAQ 4,337.5120 +70.6750 1.66%

Our Tweets

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs