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.
Way to go DGM. I bought some on Friday after I analyzed McDonald's myself last week. $94 may turn out to be a nice level of support for the stock, but either way I like the long term record.
ReplyDelete-Bryan
Nice purchase DGM! I think MCD is attractive at this price and will deliver great results over the intermediate to long term. You have been on a roll lately picking up great companies at solid valuations!
ReplyDeleteNice work DGM! I think you've added a heck of a lot of value with your rollover investments these last few months. As of now, what is your dividend run rate in the IRA now given these additional investments? Just trying to get a feel for how frequently you will be making FRIP transactions in the account.
ReplyDeleteWith their Q4 earnings announced I just did a review of them myself. Their sales are slumping but nothing to be concerned about. All companies need to take a breather and rest. They have had 13% EPS growth for 10 years. Next years 9% estimate is not going to kill anyone.
ReplyDeleteI do think we are not going to get much of a dividend raise though.
2013 free cash flow was $4.9 billion.
2014 estimated free cash flow is $5 billion. They are cutting back on their share repurchase plan so as not to endanger the dividend and probably free up some money for a raise.
But all in all as I said, all companies take a break and regroup. I'm looking to add in at $91 but your price certainly isnt bad.
I like MCD mainly right now when everybody out there is freaking out about their last earnings, which in a very long course of my investment period is nothing. I am sometimes really laughing at those "investors" bashing stocks for missing by 0.01 or similar BS. Great buy and hope this low prices will stay that way until the first week in February when I will have more cash available for purchases like MCD!
ReplyDeleteI like this buy. I've been looking at MCD recently and thinking about picking up some more shares. It looks tempting offering the near 3.5% dividend yield. And I think long term this company will continue to be a cash cow returning tons of shareholder value.
ReplyDeleteAnd, I had a McDonald's Filet-o-Fish for lunch and really enjoyed it!
Hi DGM,
ReplyDeleteMCD is a great purchase!
I have bought MCD some weeks ago - and yesterday I have bought 40 shares from HCP.
The Purchase of shares may be addictive.
I want to buy more and more and more and more shares.
But the money for this purchases must also be present ... ;-)
Best regards
D-S
Nice article. I follow the same basic principles as you lay out . I have been with Scottrade since 1997 and the FRIP plan is absolutely perfect for building positions and utilizing dividend reinvesting. Good luck to you.
ReplyDeleteRobert
why did you stop posting?
ReplyDelete