Today I bought shares of McDonald's (MCD), one of the largest restaurant chains in the world. My most recent previous purchase of MCD was in December 2013. The stock continues to be weighed down by sluggish sales growth, but I think the company is taking appropriate actions to address the issue, such as revamping its dollar menu to attract value-focused customers and renovating hundreds of restaurants to improve the dining experience. In addition, the company's sponsorship of the Winter Olympics and World Cup this year may give a short-term boost to sales.
I think MCD is slightly undervalued at the current price. It has a P/E of 17.0 (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 a discount rate equal to the current yield plus the dividend growth rate, I calculate a fair value of $100.54. Morningstar gives a fair value of $105.00 and a 4-star rating. The average of those two estimates is $102.77, which implies an 8.6% margin of safety at my purchase price.
I bought 15 shares of MCD at the price of $93.96 per share plus commission, giving me a 3.43% yield on cost. 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 and it reduced the cost basis of my MCD position in that account by 0.5%. I now have a total of 80 shares of MCD and I will receive combined quarterly dividends of $64.80. My forward 12-month dividend total increases to $4,255.
As I did with my previous purchase of MCD, I celebrated this investment with a Big Mac meal on my way home from work. :)
I have now invested all of the rollover money in my Roth IRA, which means my investing activity going forward will return to the normal level of one or two purchases per month. I just contributed $2,500 in new capital to my Roth IRA, with the goal of maxing it out for 2014 by the end of the first quarter. Once I achieve that goal, I will likely turn on Scottrade's flexible dividend reinvestment program for the remaining three quarters of the year and steer my dividend reinvestment toward whichever stock I deem to be attractively valued. I will then resume contributions of new capital to my taxable account.