Today I bought shares of McDonald's (MCD), one of the largest restaurant chains in the world. My most recent previous purchase of MCD occurred over a year and a half ago (May 8, 2012), so I was pleased to get an opportunity to increase my position.
McDonald's has experienced sluggish sales growth in 2013, which has weighed on its stock price and was reflected in the most recent dividend increase being only 5.2% (announced on September 18). However, the company has taken steps to address this short-term weakness. It introduced new menu items (e.g., Mighty Wings) over the past year, revamped its dollar menu (now called the "Dollar Menu & More"), and is working on improving efficiency. Store modernization continues to occur; in fact, a McDonald's near my workplace recently finished extensive interior and exterior renovations. It looks great inside and I noticed new technology at the counter, such as electronic displays for the menu (instead of printed placards) and for orders (the order number appears on a screen when it is ready for pick-up). Outside of the U.S., the company continues its expansion in China, announcing a significant hiring initiative earlier this year. For these reasons, I continue to be optimistic about the company's growth prospects.
I think MCD is slightly undervalued to fairly valued at the current price. It has a P/E of 17.1 (vs. a 5-year historical average of 16.8), P/S of 3.4 (vs. 3.3), P/B of 6.2 (vs. 5.7), and dividend yield of 3.4% (vs. 2.9%). Using a Dividend Discount Model with a dividend growth rate of 7% (lower than the 5-year historical rate and Value Line's estimate of 9%) and a discount rate equal to the current yield plus the dividend growth rate, I calculate a fair value of $101.48. Morningstar gives a fair value of $105.00 and a 4-star rating. The average of those two estimates is $103.24, which implies an 8% margin of safety at my purchase price.
I bought 15 shares of MCD at the price of $94.84 per share plus commission, giving me a 3.40% yield on cost. (I had set a limit order a few days ago that was executed this morning before a much greater intraday decline occurred.) At the current dividend rate, I can expect to receive quarterly dividends of $12.15 from this purchase, which will add a total of $48.60 to my annual dividend income. This purchase was made in my Roth IRA using rollover money. I now have a total of 65 shares of MCD and I will receive combined quarterly dividends of $52.65. My forward 12-month dividend total increases to $3,910.
To celebrate this purchase, today I bought a Big Mac meal on my way home from work. :)
I would consider making another similar-sized purchase of MCD if the stock price declines further. It is one of the few consumer-related stocks that is trading at a decent valuation right now. I noticed that the REITs continue to sell off -- it sure is tempting to buy more of them! However, a few of the non-REIT stocks on my watch list are near my target prices, and I might buy another one before the month ends.