Tuesday, May 6, 2014

MCD Stock Analysis -- McDonald's Corp.

McDonald's is one of the companies which belongs to both lists of dividend champion and dividend aristocrat.

Sound financial fundamental

(Data source: Morningstar)

Key points:-
1) Earnings per share increases year after year.

2) Shares decreases over the last ten years, which is good because it seems that value per share increases.  Earnings per share is a tricky indicator sometimes since some companies buy back stock shares which makes their EPS increase annually.  This is not the case for McDonald's.  If the same shares qty at 1,274 is used for all past 10 years, its EPS is still in a uptrend.

3) Dividend grows year after year, and its payout ratio is within manageable range (less than 60%).

4) Free Cash Flow Per Share increases annually, and the the annual data covers dividend very well.  This is a good indicator to show organic growth.

5) ROE and ROIC are both increasing, even in those difficult years 2007-2010.  ROIC is higher than 12% too.

Annual dividend review 

Key points:-

1) In the past 37 years, average year-after-year dividend growth rate is 24.39%;  Average annual dividend growth rate in the past 10 years is 23.74%; and the 5-year average is 14.10%.
2) In the past 37 years, McDonald's increased its dividend every single year, which is pretty impressive.
3) Based on the 10 by 10 form, take 3% as the initial yield, and annual dividend growth rate at 14%, it will take around 9 years to reach annual 10% return.  This is pretty cool.  It is why I like this stock and give it a rating of 5 stars.

Entry point

Entry point is a very subjective topic.  I usually consider factors such as one year target prices at Yahoo and Scottrade, PE ratio, 52-week high low prices, and current yield. My entry point thus I believe is rather conservative in a long run and leaves me with some cushion. The entry point for McDonald's is $94.

Disclosure:  Long MCD.  Waiting for market price to fall to my entry point for purchasing some shares.

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