Amazing dividends
Dividends are another reason to fancy McDonald’s. McDonald’s has increased its dividend each of the past 35 years! Also keep in mind that the last 18 months saw a 26% jump. Since 2011 the company paid about $8 just in dividends. Therefore, investors who bought shares back then at $74 – $75 have benefited both from share price increases and dividends: an amazing overall 40% return on investment in 2 years. As McDonald’s continues increasing its dividends and the current stock price goes to the fair price estimate in the next months, I see a similar potential return for the next 2 years.
Graphic from “McDonald’s: A Deeper Look At Its 29% Dividend Growth Rate” article on Seeking Alpha
There may be many competitors in each country, but not even one strong competitor at a global scale
Let’s face it, there are plenty of competitors in each country. But there is not even one big global strong competitor. Perhaps some may think that Burger King Worldwide Inc (NYSE:BKW) is a strong global competitor, but unlike McDonald’s Corporation (NYSE:MCD), the company is losing sales. In the latest earnings call, it was reported that not only U.S. and Canadian comparable sales fell by 3% in the first quarter of the fiscal year, but the company is also experiencing trouble in Latin America, where sales fell another 1.3%. Notice that McDonald’s has far more resources than Burger King Worldwide Inc (NYSE:BKW) and this allows it to have negotiation power with its suppliers. For more information about the relation between Burger King and McDonald’s, check my short case for Burger King Worldwide Inc (NYSE:BKW).
The bottom line
There’s another reason for being long McDonald’s. Most fast food and restaurants are overvalued at the moment. Just to mention some examples Noodles & Co. is trading at a crazy 100x earnings and burrito shop Chipotle Mexican Grill, Inc. (NYSE:CMG) at a juicy 42 times multiple, well above the average valuation for a public company in the U.S. These 2 examples are growth stocks that became public recently.
But as growth stocks, there are plenty of risks in investing in them. For example, Noodles & Co. has forecasted 2,500 stores in the next 15-20 years. Although restaurant locations expanded by 15% since 2012 and sales grew by 17%, achieving 2500 stores means the company will have to keep its amazing growth rate for about 10 years, a very difficult challenge for any company to say the least.
Chipotle, on the other hand, had a tough 2012, as investors wonder if Chipotle Mexican Grill, Inc. (NYSE:CMG) can still grow or not. Also, unlike McDonald’s, Chipotle doesn’t have any negotiation power with its main suppliers due to its still small scale. That makes Chipotle vulnerable to minimum-wage increases, volatility in the price of beef, chicken and pork, and business cycles. If you own or are considering owning shares in Chipotle, you better check The Motley Fool’s special report now to get a deeper insight.
McDonald’s, on the other hand, isn’t a growth stock any more but it is a safe stock, as it has a long story of increasing dividends and a strong global brand. You know your grandchildren will eat McDonald’s Corporation (NYSE:MCD). Even better, it’s current PE ratio (17) is well below Noodles & Co. and Chipotle Mexican Grill, Inc. (NYSE:CMG). This could be a great time to go long the stock.
The article Why I’m lovin’ McDonald’s originally appeared on Fool.com and is written by Adrian Campos.
Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide, Chipotle Mexican Grill, and McDonald’s. The Motley Fool owns shares of Chipotle Mexican Grill and McDonald’s. Adrian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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