McDonald’s (MCD) Stock Analysis
The McDonald’s dividend has been paid continuously since 1976 and increased for 41 consecutive years; qualifying the company for the Dividend Aristocrats and Dividend Champions list.
Current Dividend: $3.76
Dividend Yield: 2.4%
Cash Dividend Payout Ratio: 77%
Market Capitalization: 127 B
Enterprise Value: 153 B
Sector: Consumer Cyclical
McDonald’s is the largest food service retailer in the world with over 36,000 locations in 120 countries. Revenue is generated through company owned restaurants, franchise royalties, and licensing pacts.
McDonald’s restaurants are 85% owned and operated by independent entrepreneurs (with a future target of 95%). Their restaurants offer a mostly uniform menu although, in order to meet the preferences and tastes of local customers, variations are made geographically.
The value-priced menu centers around their hamburgers and cheeseburgers. Iconic menu items include the Big Mac, Quarter Pounder, Filet-O-Fish, Chicken McNuggets, World Famous Fries, and more recently McCafe beverages and McFlurry desserts.
Dividend Analyzer Checklist
(updated September 2017)
Dividend Safety Score (10/33 points)
Dividend Per Share (ttm): $3.71
Dividend Payout Ratio (ttm): 45%
Cash From Operations (CFO) Per Share (ttm): $6.95
CFO Dividend Coverage (CFO / DPS): 1.9 (1/6 points)
Free Cash Flow (FCF) Per Share (ttm): $4.74
FCF Dividend Coverage (FCF / DPS): 1.3 (1/6 points)
Net Financial Debt: $24795 M
Total Assets: $32120 M
Net Financial Debt / Total Assets: 77% (0/12 points)
Net Financial Debt to EBITDA (ttm): 280%
Total Liabilities to Assets Ratio (Qtr.): 106%
Piotroski Score (1-9) (TTM): (8/9 points)
Profitability & Growth Score (13/33 points)
Revenue (10 Year Growth) *CAGR > 4.14%: 1.7% (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%: 3.4% (0/6 points)
Operating Earnings Yield (ttm): 6.4% (2/7 points)
Net Income (ttm): $5079 M
Gross Profit (ttm): $10443 M
Total Assets: $32120 M
Gross Profitability Ratio = GP / Total Assets: 33% (7/12 points)
Cash Return On Invested Capital (CROIC)(tttm): 16%
Return on Invested Capital (ROIC): 20%
Return on Invested Capital (ROIC) (5 Year Median): 18%
Return on Invested Capital (ROIC) (10 Year Median): 19%
Valuation Score (10/34 points)
Free Cash Flow Yield (ttm): 3.0% (4/9 points)
EV to EBIT (ttm): 18.5 (3/9 points)
EV to EBITDA (ttm): 15.8 (3/9 points)
PE10: 33.8 (0/7 points)
Price to Sales Ratio (ttm): 5.4
Price to Book Value (ttm): n/a
Price to Earnings Ratio (P/E) (ttm): 25.8
TOTAL POINTS – (33/100) (50 is an average score)
*Compound Annual Growth Rate (CAGR)
**A Compound Annual Growth Rate of 4.14% = a 50% gain over 10 years.
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SWOT Analysis For McDonald’s
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.
McDonalds’ CEO Steve Easterbrook has initiated all-day breakfast successfully. In addition they’re trying higher quality ingredients, and emphasizing coffee/snacking convenience items while not disturbing their strong value-priced menu.
Volatility in commodity prices, rising labor costs, food borne illnesses, and foreign currency fluctuations (over 60% of MCD profits come from outside the U.S) are all part of the challenges of operating a global company. Low barriers to entry allow intense competition from global, regional, and local competitors.
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).
With delivery being a major trend no one is better positioned that McDonalds when it comes to location. McDonalds is closer to more customers than any other restaurant in the world. In McDonalds top 5 markets nearly 75% of the population lives within three miles of one of their restaurants.
The quick service restaurant industry is extremely competitive, subject to price wars, rising labor costs, and increasing concerns about food quality and healthy eating. The fast casual category is very mature and growing chains such as Five Guys, In-N-Out Burger, and Shake Shack put pressure on McDonalds to keep prices low and/or upgrade their product offerings. It’s a tough business.
(updated September 2017)
McDonald’s (MCD) is ranked #292 (out of 342) overall and #57(out of 59) in the Consumer Cyclical Sector by the Dividend Analyzer. There are currently many better choices in the Consumer Cyclical sector and the stock market in general.
Type of Investor / Recommendation
Large Diversified Dividend Portfolios / AVOID
Looking For Exposure to Consumer Defensive Sector / AVOID
Deep Value Investors / AVOID
Portfolio Position Disclosures:
DVB Foundation Portfolio: None
DVB Dividend Growth Portfolio: None
DVB High Income Portfolio: None
Arbor Asset Allocation Model Portfolio (AAAMP): None
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