McDonald’s (MCD) Stock Analysis
The McDonald’s dividend has been paid continuously since 1976 and increased for 45 consecutive years; qualifying the company for the Dividend Aristocrats and Dividend Champions list.
Current Dividend Annualized: $5.16
McDonald’s (MCD) Intrinsic Value – Margin of Safety Analysis
(updated June 2021)
Normalized Diluted Earnings Per Share (TTM): $6.89
Cash Flow From Operations (CFO) Per Share (TTM): $9.12
Free Cash Flow Per Share (TTM): $7.09
Estimated Intrinsic Value: $167
Target Buy Price Based on Required Margin of Safety = $128
(Required Margin of Safety Based On Risk Stability Grade:
A = 10%, B = 20%, C = 30%, D = 40%, F = 50%)
Target SELL Price Based on Estimated Intrinsic Value = $183
(Allow Overvaluation Adjusted by Risk Stability Grade:
A = 20%, B = 15%, C = 10%, D = 5%, F = 0%)
Risk / Stability Grade: C
A grade indicates a quality company with a strong balance sheet, high earnings quality, and a positive business environment. These stocks require the slimmest margin of safety within the stock universe.
B grade indicates a company with a good balance sheet, good earning quality, and a stable business environment. The margin of safety required should be greater than stocks with an A grade but less than the average stock.
C grade indicates a company with a sufficient balance sheet, at least average earnings quality, and a reasonably stable business environment. The margin of safety required is greater than A & B stocks, but less than D & F stocks.
D grade indicates a company in good standing but has issues that could affect its stability and long term risks. D rated stocks should require a large margin of safety when purchased.
F grade indicates a company with significant issues that are currently affecting its stability and long term risks. Require an extremely large margin of safety for F rated stocks when purchased.
Dividend Safety Grade: C
A grade indicates an extremely low probability of a dividend cut. This rating is reserved for companies with strong balance sheets and/or excellent dividend histories.
B grade indicates a very low probability for a dividend cut.
C grade indicates a low probability for a dividend cut and/or average safety risk.
D grade indicates there are issues that should be considered concerning future dividend payments.
F grade indicates serious dividend safety risks. Investors should complete comprehensive due diligence before investing.
Earnings Quality Grade: C
A grade indicates earnings quality is high or far above average.
B grade indicates earnings quality is good and/or above average.
C grade indicates earnings quality is acceptable or average.
D grade indicates earnings quality is poor and requires thoughtful due diligence.
F grade indicates the quality of the earnings is poor or far below average requiring serious due diligence.
Earnings Report: 3/31/21
AAAMP Position Disclosures:
Global Value – None
Dividend Growth & Income – None
Treasure Trove Twelve – None
Global Dividend Balanced – None
Aggressive Growth Balanced – None
High Yield Balanced – None
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Sector: Consumer Cyclical
McDonald’s generates revenue through company-owned restaurants, franchise royalties, and licensing pacts. Restaurants offer a uniform value-priced menu with some regional variations.
As of December 2018, there were roughly 37,900 locations in 120 countries: 35,100 franchisee/affiliate units and 2,800 company units. After reorganizing the company into segments based on the maturity and competitive position of its different markets, refranchising 4,000 locations, and eliminating $500 million in net annual SG&A expenses the past several years, the company is focused on “velocity growth accelerators” such as Experience of the Future layout (counter, kiosk, web ordering and table service/curbside delivery), mobile ordering and payments, and delivery alternatives.
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 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.
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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.