Thursday, December 12, 2013

Stock Bought: MCD

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.


  1. DGM,

    Great stuff to see you continue to put fresh capital to work. Really inspiring.

    I wish I could follow you into battle, but a significant portion of my reserve capital has been siphoned off by the purchase of my Corolla. I did make a rather small purchase yesterday, however, and I'll be posting about that very soon. I wish I could buy more!

    Keep up the great work. Nothing like celebrating increasing ownership in MCD like a Big Mac! I love mine with extra sauce. Mmm. :)

    Best wishes!

    1. DM: Thank you! It feels good to put so much capital to work in such a short time period. I'm glad it's inspirational to others.

      I read the post about your Corolla on your blog. It sounds like a good deal and I can personally attest to Corollas being fine cars (I own one). I hope it serves you well!

  2. DGM,

    I like this stock, it's dividend and overall performance. I own it and plan purchasing it as well. I think you did a great buy and getting a good deal.

    I laugh when seeing investors selling stocks like this because of one quarter slower performance. For me the biggest indicator is the dividend. Was the dividend endangered? No it wasn't, Was the dividend cut? No it wasn't. So there is no need to sell.

    I agree with you that MCD is a very experienced company which will address a slow down and will grow again, so this decline in price is a great opportunity to add more shares. I will be laughing again when all those "gurus-idiots" who are now selling will be rushing back. I love these sell offs

    1. Martin: Thanks for your comment. I completely agree -- some people get too caught up in short-term weakness and lack a long-term view. McDonald's is one of the best restaurant companies in the world and you can bet they are working hard to improve the business. As I mentioned in my post, I've seen firsthand evidence of this at my local McDonald's. I hope the stock price declines further so that I can make another purchase at an even better valuation.

  3. MCD has been hurt by the stronger USD. MCD is a good inflation hedge and a way to get into emerging countries.

    1. Anonymous: Good points -- I think China in particular presents a nice growth opportunity for MCD.