McDonald’s Dividend Stock Analysis (MCD)

Description

Sector: Consumer Cyclical
Industry: Restaurants

McDonald’s is the largest food service retailer in the world with over 36,000 locations which serve 69 million customers in 119 countries each day. Revenue is generated through company owned restaurants, franchise royalties, and licensing pacts.

McDonald’s restaurants are 80% owned and operated by independent entrepreneurs. Their restaurants offer a mostly uniform value-priced menu centered around their hamburgers and cheeseburgers. Iconic menu items include the Big Mac, Quarter Pounder, Filet-O-Fish, Chicken McNuggets, World Famous Fries, and recently McCafe beverages.

SWOT Analysis For McDonald’s

Strengths

McDonald’s powerful brand and size (which provides economies of scale) provide sustainable competitive advantages. McDonald’s has enjoyed world wide success because of its franchisee system (local entrepreneur ownership), a uniform value priced menu of iconic choices, and corporate management that has generally provided a platform for success.

Weaknesses

Volatility in commodity prices, rising labor costs, foodborne illnesses, and foreign currency fluctuations are all part of the challenges of operating a global company. Low barriers to entry allow intense competition from global, regional, and local competitors.

Opportunities

The company is making a big effort to become more flexible. Its recent successful move to serve breakfast all day was an example. They’re doing some limited experiments with different formats that provide more ordering flexibility (i.e. kiosks, and mobile ordering), and menu customization (ability to custom build burgers and sandwiches).

Threats

The quick service restaurant industry is extremely competitive, subject to price wars, rising labor costs, and increasing concerns about food quality and healthy eating.

Dividend Analyzer Checklist

(updated January 2017)

Dividend Safety Score (11/33 points)

Dividend Per Share (ttm): $3.56
Dividend Payout Ratio (ttm):  66%
Dividend Per Share (10 Year Growth): 18%
Cash From Operations (CFO) Per Share (ttm):  $7.50
CFO Dividend Coverage (CFO / DPS):  2.1 (2/6 points)
Free Cash Flow (FCF) Per Share (ttm):  $5.52
FCF Dividend Coverage (FCF / DPS): 1.6 (3/6 points)
Net Financial Debt:  $24513 M
Total Assets:  $32487
Net Financial Debt / Total Assets:  75%  (0/12 points)
Net Financial Debt to EBITDA (ttm):  257%
Total Liabilities to Assets Ratio (Qtr.):  105%
Piotroski Score (1-9) (TTM): (6/9 points)

Profitability & Growth Score (20/33 points)

Revenue (10 Year Growth) *CAGR > 4.14%:  2.9% (0/4 points)
EPS Basic Cont. Operations (10 Year Growth) CAGR > 4.14%:  9.0% (4/4 points)
Cash From Operations (10 Year Growth) CAGR > 4.14%: 4.2%  (6/6 points)
Operating Earnings Yield (ttm):  7.0%  (3/7 points)
Net Income (ttm):  $4673 M
Gross Profit (ttm):   $10153 M
Total Assets:  $32487 M
Gross Profitability Ratio = GP / Total Assets:  31%  (7/12 points)
Cash Return On Invested Capital (CROIC)(tttm):  18%
Return on Invested Capital (ROIC):  17%
Return on Invested Capital (ROIC) (5 Year Median):  19%
Return on Invested Capital (ROIC) (10 Year Median): 18%

Valuation Score (16/34 points)

Free Cash Flow Yield (ttm):  4.5%  (5/9 points)
EV to EBIT (ttm):  16.4  (4/9 points)
EV to EBITDA (ttm):  13.7  (4/9 points)
PE10:  25.2  (3/7 points)
Price to Sales Ratio (ttm):  3.9
Price to Book Value (ttm):  148.1
Price to Earnings Ratio (P/E) (ttm):  21.0

TOTAL POINTS – (47/100) (50 is an average score)

*Compound Annual Growth Rate (CAGR)
**A Compound Annual Growth Rate of 4.14% = a 50% gain over 10 years.

Type of Investor / Recommendation

Large Diversified Dividend Portfolios / Avoid
Looking For Exposure to Consumer Defense Sector / AVOID
Deep Value Investors / AVOID

McDonald’s (MCD) is ranked #139 (out of 246) and #28 (out of 31) in the Consumer Cyclical sector by the Dividend Analyzer. There are currently many better choices in the Consumer Cyclical sector.

Portfolio Position Disclosures:
DVB Foundation Portfolio – None
DVB Dividend Growth – None
DVB High Income – None
Arbor Asset Allocation Model Portfolio (AAAMP) – None

Disclaimer:
While Arbor Investment Planner has used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability, or completeness of third-party information presented herein. The sole purpose of this analysis is information. Nothing presented herein is, or is intended to constitute investment advice. Consult your financial advisor before making investment decisions.