How Attractive Is McDonald’s Corporation (MCD) Stock?

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McDonald’s Corporation (NYSE:MCD) stock has both plus and minus as far as attractiveness is concerned. It would be tough to compare the stock with the other sectors like the financial sector. For instance, the top four banks valuation might be cheaper than the food retailer and enjoy lower multiples than the food firm. However, the multiples differ based on the sectors, and it would not be the right choice to compare one stock with another sector. The financials might have lower multiples but faces the threat of uncertainty on interest rate hike and the economic sluggishness. Therefore, it is better to look into the positives or the attractiveness of the stock individually or the sector-wise or in comparison with the similar size of the same sector.

Franchise Model To Help

McDonald’s Corporation (NYSE:MCD) has more than 36,500 stores spread over 125 nations in the world. The company also took special care to locate in the most coveted places in the world thus getting the competitive edge. Also, scale is one factor that places its strength on operational efficiency, as well as, the negotiating power with suppliers. That meant generating key advantages as far as the competitiveness is concerned in terms of costs and price. The management conceived a plan to franchise its model as much as it can within the next few years.

As part of it, the chain of food retailer refranchised 470 restaurants last year. McDonald’s Corporation (NYSE:MCD) has a plan to refranchise another 4,000 restaurants before the end of the year 2018. As a result, the franchised base would get a boost to approximately 95% of the stores in the future from 82% of all stores. The key advantage from the business model is that it could generate a good chunk of recurrent cash flows. That will help the management to take a call on boosting the dividend payout apart from increasing the share repurchase program. Both will help investors’ cause.

Solid Dividend Track Record

Since 1976, McDonald’s Corporation (NYSE:MCD) has been paying a dividend. The best part of it is that it has been increasing its dividend rate continuously for 39 straight years. Currently, its dividend offers a yield of 2.8% while the five-year average dividend yield is 3.00%. The dividend rate of $3.56 a year meant that the dividend payout ratio was 73.0%, which was higher than the five-year dividend payout ratio of 62.0%. Similarly, growth in dividend rate for the average five-year period is 8.50% while the three-year period suggested 5.79%. Though revenue is expected to face pressures, earnings are likely to report growth in the current year and the next year. That meant there is likely to be EPS growth, which, in turn, will push the dividend pace. Aside from the stock growth, the dividend growth encourages investment to beat the interest rates, which are under pressure now.

Business Model Doing Well

McDonald’s Corporation (NYSE:MCD) has performed creditably in the last ten years as an investment. Its business also performed quite well with revenues, profit and EPS registering a growth of 2%, 6% and close to 10% respectively between the years 2005 and 2015. If the investors take into account the higher payout ratio of dividend and earnings multiple expansions; the total return would have been much better. That would have made a total gain of around 15% a year in the last one decade. Such returns would have forced the existing investors to lift their investments. However, it would be a question mark whether any fresh investor would enter the counter now with a similar hope.

One of the reasons is that McDonald’s Corporation (NYSE:MCD) has reached a higher level than what it was a decade back. The base level has increased in the ten-year period. Therefore, it would be a big question as to how much the share buyback would be effective. That is because it has an ambitious capital allocation program. However, that does not mean that there is no growth. While incremental percentage of profit and EPS can be recorded, it might not be the in the same percentage as the last decade. Also, growing in the current market conditions are not an easy one. Analysts expect the company to report EPS of approximately $6 for the next year and the expectations for the medium-term is that EPS would likely grow around 10%, which meant that it was in line with the last decade achievement.

Valuation

McDonald’s Corporation (NYSE:MCD) shares are trading cheap if PE for the trailing twelve-month period is taken into consideration. Its current PE is only 26.6 times compared to the industry average of 29.3. Its forward PE is 21.29 times. Both the TTM and forward PE suggested that the stock is trading cheap only. The food retailer has healthy operating margin of 28.1% for the TTM period, which was stronger than 15.2% of the industry average. Similarly, its net margin doubled to 17.8% from 8.9% of the industry average. Its return on equity and assets were also higher than the industry average at 45.4% and 12.5% respectively.

There are also three concerns on McDonald’s Corporation (NYSE:MCD) shares. For instance, its price to book and price to sales for the TTM were 16.2 times and 4.7 times respectively compared to the 10.2 times and 2.6 times respectively. Its debt to equity ratio of 3.4 is higher than the industry average of 2.3.

Conclusion

It would be tough to expect revenue growth of any significant percentage in the upcoming years. The size of the food retailer has grown. Though McDonald’s Corporation (NYSE:MCD) will not see revenue growth in the immediate next few years, its EPS will grow. Significantly, the continued increase in dividend has offered a good yield to the investment.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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