Peter Lynch once said, if you can’t find a reason to buy more shares, you probably shouldn’t own the stock in the first place. This is why I constantly try to come up with reasons to continue buying the stocks I own. Since McDonald’s Corporation (NYSE:MCD)’s just reported earnings, I was able to examine the company’s report and I found five good reasons to continue owning the stock.
Everything About The Company Is Boring, Except For The Stock
McDonald’s Corporation (NYSE:MCD) is a stock that I actually overlooked for too long because I couldn’t see a way for the company to expand its earnings. Management has proven skeptics wrong time after time by introducing new menu items, and re-imaging its restaurants. Last year, I finally came to my senses and bought shares.
Though the restaurant industry is rife with competition, McDonald’s Corporation (NYSE:MCD) marches on. While Yum! Brands, Inc. (NYSE:YUM) takes its KFC and Pizza Hut chains to China, McDonald’s opens new restaurants in China too. When Starbucks Corporation (NASDAQ:SBUX) tries to dominate the coffee industry, McDonald’s introduces the McCafe lineup. As the McDonald’s spinoff Chipotle Mexican Grill, Inc. (NYSE:CMG) expands its burrito rolling prowess nationwide, McDonald’s Corporation (NYSE:MCD) introduces new menu items. The bottom line is, there is a lot of competition, but McDonald’s isn’t done growing.
More Than Blind Faith
There has to be more than blind faith behind an investment thesis, or the investor is likely to lose money. When I bought McDonald’s, I did so because I liked the company’s yield, their expansion plans made sense, and they produced huge cash flow. Today, many of the same positives still exist, but I’ve also discovered a few new reasons to own the stock.
First, McDonald’s Corporation (NYSE:MCD) class leading yield can’t be overstated. Even at current prices, the stock pays a yield of just over 3%, which makes Yum! Brands, Inc. (NYSE:YUM) at 2%, and Starbucks Corporation (NASDAQ:SBUX) at 1.4% look puny by comparison. Even more important, with a roughly 63% free cash flow payout ratio on average over the last four quarters, the dividend looks safe.
A second reason I own the stock is, the company is committed to repurchasing shares. Peter Lynch also said that it doesn’t take much imagination for a company to mail dividend checks, or repurchase shares, but it’s sometimes the best use of their cash. McDonald’s management agrees, and has retired 1.86% of the diluted share count in the last year. While it’s true that Yum! Brands, Inc. (NYSE:YUM) and Chipotle Mexican Grill, Inc. (NYSE:CMG) retired more shares at 2.15% and 1.94% respectively, neither matches McDonald’s yield. Starbucks Corporation (NASDAQ:SBUX) retired 1.55% of their shares, but again their yield comes up short.
Third, McDonald’s has a class leading operating margin. Since the company relies on its franchisees to open new locations, their margins are much higher than their competition. While Chipotle Mexican Grill, Inc. (NYSE:CMG) has a very efficient business model, their operating margin is 16.5%. Relatively speaking, Yum! Brands, Inc. (NYSE:YUM) is more efficient with a margin of 19.21%, but Starbucks Corporation (NASDAQ:SBUX) can’t compete with Chipotle Mexican Grill, Inc. (NYSE:CMG)’s efficiency at 15.3%. Though 15% or 19% margins are nice, McDonald’s destroys the competition with a 29.51% margin in the last three months.
A fourth reason to own the shares is, they appear to be a relatively good value. In fact, using the PEG+Y ratio, McDonald’s Corporation (NYSE:MCD) is actually the second best value of their peer group. The PEG+Y ratio is sort of like an inverted PEG ratio, in that it adds the yield to the growth rate, then divides by the P/E ratio. Unlike the PEG, where the lower the number, the better, with the PEG+Y, the higher the number the better.
Using this metric, McDonald’s 3.01% yield, 8.69% growth rate, and forward P/E of 17.89, gives the company a PEG+Y of 0.65. The only company with a better combination of traits is Starbucks Corporation (NASDAQ:SBUX) with a PEG+Y of 0.72. Starbucks’ higher growth rate more than offsets the company’s relatively lower yield and higher P/E ratio. By comparison, Yum! Brands, Inc. (NYSE:YUM) is expected to grow faster than McDonald’s, but pays a lower yield, and has a higher P/E, thus the company’s PEG+Y comes in at 0.62. Chipotle Mexican Grill, Inc. (NYSE:CMG) may be expected to grow the fastest of the group, but the stock is priced accordingly, and carries a PEG+Y of 0.56.
Last but not least, investors shouldn’t overlook the value of the company’s re-imaging program. When a McDonald’s is re-imaged, the store is updated to better match the casual dining segment, rather than a traditional fast food place. Higher end furniture, free Wifi, and LCD televisions, should help customers relax and stick around to buy more. McDonald’s is going after the crowd that would visit a Starbucks or a Panera Bread Co (NASDAQ:PNRA). Given Starbucks Corporation (NASDAQ:SBUX) and Panera Bread Co (NASDAQ:PNRA)’s growth rates, there is no question this is a smart move.
The bottom line is, McDonald’s looks like a solid value, even after the run the stock has been on. The company is constantly reinventing itself and new menu items help to expand their customer base. The company is challenged right now because over 39% of their revenue comes from Europe, but as those economies heal, McDonald’s will be there to benefit from the upturn. Investors get paid a competitive yield, the company keeps buying back shares, and opening new locations. This seemingly boring business has given me plenty of reasons to stick with the stock.
The article 5 Reasons I Continue To Own This Stock originally appeared on Fool.com and is written by Chad Henage.
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