Tuesday, May 8, 2012

Stock Bought: MCD

Today I bought shares of McDonald's (MCD), one of the largest restaurant companies in the world, with over 33,000 restaurants serving about 68 million people per day in 119 countries. It is a well-known brand with its signature Golden Arches and popular menu items that include Big Macs, Quarter Pounders, Chicken McNuggets, Filet-O-Fish sandwiches, and their classic French Fries, as well as a variety of beverage, dessert, and breakfast selections.

I think McDonald's is a stable, well-run company with good long-term prospects. MCD also happens to be a great dividend growth stock. The company has increased its dividend for 35 consecutive years -- every year since initiating its dividend payout in 1976. It has a 5-year dividend growth rate of 20.4% and the most recent increase (in December 2011) was 14.8%.

The stock's price decreased by more than 2% today after the company reported April sales that were lower than analysts' expectations. However, it is worth noting that the company's monthly sales still grew by over 3% worldwide and its year-to-date sales growth is higher than for the corresponding period in 2011. I don't pay much attention to technicals, but I did notice that today's dip moved the stock's price below its 200-day moving average to a 5-month low. On a fundamental basis, it put MCD in what I consider to be fair-value territory with a P/E of about 17.5 (previously, I felt the stock was a bit overvalued). I decided to take advantage of this price decline and increase my position in this excellent company.

I bought 15 shares of MCD at the price of $93.46 per share. Given that I had capital appreciation on my existing position, I was not able to average down, but that's okay. I now have a total of 50 shares at an average price of $88.84 per share, giving me a 3.15% yield on cost. At the current dividend rate, I can expect to receive quarterly dividends from MCD of $35.00, which is a nice increase compared with the $24.50 I was getting before this purchase. Given that the stock will go ex-dividend near the end of May, I will start receiving my higher dividend with the June payment. MCD will now contribute a total of $140.00 to my annual dividend income, which is $42.00 more than before. MCD has also become the largest position in my portfolio, slightly above Philip Morris International (PM).

14 comments:

  1. Nice pickup! I've been eyeing MCD's too but the yield hasn't been able to crack the 3% threshold I require yet....

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    1. Hi Ben,

      Thanks for your comment. The stock reached the 3% yield point today; in fact, that's essentially the yield at my purchase price (2.996%).

      Cheers,

      Deedubs

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  2. Deedubs,

    Nice purchase here. I initially purchased MCD in the mid-$70's and then again recently when it dipped below $100. If it goes much lower than here I think it'd be awfully tempting to add to my existing position. MCD, as you point out, is one of the most recognized and well-run businesses in the world. I'm lovin it!

    Best wishes.

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    1. Hi Dividend Mantra,

      I consider MCD to be a core holding in my portfolio, so I was happy to get a good opportunity to increase my position. If the price continues to drop, then I would seriously consider buying more. I'm lovin' it, too!

      Cheers,

      Deedubs

      Delete
  3. Nice Purchase. Although I don't believe they can sustain their 5-year DGR, I do believe they will continue increasing dividends and provide a nice return. MCD is a company that will still be here in 20+ years. Their P/E seems a little high to me but they are on my watch list.

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    1. Hi austinbroker,

      Thanks for your comment. I agree that their 5-year DGR of 20% is not sustainable; however, I think 10-15% is reasonable for at least the next few years and I would be satisfied with increases in that range. The P/E is a little high (compared with the average of the S&P 500, for example), but I think a bit of a premium is justified by the company's superb operating performance and dominance in the restaurant industry. I agree that the company will still be here in 20+ years; plus, it has plenty of room for expansion into Asia and other emerging markets.

      Cheers,

      Deedubs

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  4. Good choice for new money. I stopped by a McDonald's last weekend for breakfast and of course it's packed. This particular store had 2 drive throughs and I still had to wait 15 mins to get my Egg McMuffins. There were that many cars. MCD is obviously doing something right. I have a limit order for MCD in right now, we'll see if it gets filled.

    CI

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    1. Hi Compounding Income,

      I've had the same experience -- there is always a line-up inside or at the drive-thru whenever I go by a McDonald's. The company definitely knows how to run its business well.

      Cheers,

      Deedubs

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  5. Thanks for the information. I agree selecting good dividend paying with proven track record at the right price would go along way. Have a question on trading costs, how do you account for those? Are those included in your cost basis, who are the right type of brokerage accounts to choose in your opinion? Thanks much for your time in advance.

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    1. Hi Suresh,

      Trading costs are included in the costs indicated on my Portfolio page. They tend to be very small proportions of the total costs because most of my positions reflect only one or two purchases. As for which brokerage account to use, there are many suitable choices available, such as E*Trade, Fidelity, Schwab, Scottrade, Sharebuilder, and TD Ameritrade, just to name a few of the popular ones. If you search online you can find side-by-side comparisons that may help you determine which brokerage is best for you.

      Cheers,

      Deedubs

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    2. May I also suggest TradeKing? They charge $4.95 per trade and have a free DRIP (and allow partial share repurchases on the DRIP). The online customer service is top notch, too. That is the brokerage that I use (switched from Scottrade last year), but there are several other good ones out there as well.

      Best of luck!

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  6. Nice pickup on MCD, deedubs. I, too, had been looking to pick up some shares with this pullback. The yield has crossed 3% again and I think that we will see some nice dividend increases for the short-term.

    Take care!

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    1. Hi Dividend Fool,

      Thanks! I agree that we should continue to see some nice dividend increases from MCD for a while.

      Cheers,

      Deedubs

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