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McDonalds – Why I’m Loving Its Stock

Last month I bought MCD with the intention of holding the stock for an extended period of time in my retirement portfolio. In this post I’m sharing the basic reasons for why I bought the stock last month at just under $98 a share.

1. Dividends don’t lie. McDonalds pays a safe 3.30% per year in dividends. In my case I intend to reinvest these dividends to compound gains in the stock for years to come. But no matter what you use the dividend for, being paid to wait for a move in the stock (and cushioning any dips in its value) is compelling, especially with yields elsewhere being so paltry. The company’s dividend is also safe, with the payout ratio (the percentage of revenue a company uses to fund its dividend) at a modest 56%. The company has increased its dividend for 34 straight years with a ten year growth rate in the dividend above 20%.
2. McDonalds is a superb brand that had been beaten up recently for underperformance as compared to Burger King. It faces weakness in its breakfast offerings with Starbucks and Dunkin Donuts being new fierce competitors. They have to improve their coffee offerings to compete with these new guys. But these headwinds don’t mask that people still eat at McDonalds every day, all day long. The company is a cultural icon that leverages it’s iconic brand into a a cash flow machine with thick profit margins.
3. It has a fortress balance sheet.  The company has a nice chunk of assets in cash, and on top of that they generate so much annual cash that they’re balance sheet is so safe (it’s a “fortress”).  As for the other 44%, they can use all that cash to invest  in dominating global fast food. And I do mean global. MCD is just getting started expanding and I expect the international growth will fuel their expansion for decades. I plan to buy and hold for a long long time.
4. The Valuation is reasonable. MCD’s enterprise value (market cap + debt – cash) is just over $100 billion. With annual revenue exceeding 10 billion, we are buying the stock when it is trading at around 10-times earnings–a reasonable multiple for such a high quality company and one that is lower than the S&P average.
Bottom Line: McDonald’s is a stable global giant with huge opportunities in international expansion trading at a reasonable valuation that accounts for some of its very real business challenges and recent weakness in management execution. The shar price may dip short-term, but as a long term holder I think this is a good entry.

Action I’m taking:

3/17: Buy MCD Below $98, hold for long term and reinvesting my dividends.

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