10 Core Stocks for Your Portfolio: McDonald's

This week and last, we're presenting 10 core stock ideas -- stocks our writers believe can serve as the foundation for a long-term-focused portfolio.

Many of the people reading this had a cup of coffee, ate a meal, tried a smoothie, or grabbed a snack at McDonald's (NYSE: MCD  ) today. At the pace reported last quarter, today's sales at the Golden Arches will total over $65 million across the globe.

Here's a business snapshot.

Company Name

McDonald's

One sentence statement of operations

McDonald's operates or franchises over 32,000 fast-food restaurants around the world.

Recent price

$75.13

Market Cap

$80.0 Billion

Forward P/E (2011 EPS)

15.3

ROE

36.3%

Source: Yahoo! Finance and Capital IQ.

The business
McDonald's has over 32,000 restaurants around the world, with about 26,000 franchised and the rest company-owned. Franchised restaurants contribute rent and royalties to McDonald's revenue.

The menu includes burgers, other sandwiches, fries, breakfast items and a variety of drinks with many items on the value-oriented Dollar Menu. Recently, the menu has been expanded to include coffee drinks, smoothies and Angus burgers to add higher-priced and higher-margin items.

Why it's a core stock
A core holding should have two key characteristics.

  • A reasonable dividend yield with a track record of increasing the payout and good prospects for continuing those raises.
  • A business model that works in any economic environment.

Others may have different investment needs and use different criteria to define a core stock, but those are mine and together they add up to a stock with a potential holding period of forever. So how does McDonald's stack up?

At the current price and dividend rate, McDonald's yields a little over 3.2%, well above the yield on a 10-year Treasury. In fact, it just announced a sizeable bump in its payout. The company has increased the dividend every year since 1976 when it first paid one. With a payout ratio -- the portion of earnings paid as dividends -- of less than 50% and projections of continued revenue and earnings growth, McDonald's has the ability to continue giving shareholders those nice annual raises.

McDonald's has proven it's an all-weather holding over the recent stock market roller coaster ride. Using the SPDR S&P 500 (NYSE: SPY  ) ETF as a benchmark for the stock market, here's how McDonald's stacks up with both securities adjusted for dividends over the last three years.

Metric

SPY

Change

MCD

Change

Market High

147.07

 

51.23

 

Market Low

66.57

-54.74%

48.39

-5.54%

Recent Price

112.49

68.98%

74.32

53.59%

*Source: Yahoo! Finance and author's calculation.

McDonald's shareholders saw only a little of the market's slide from the highs of late 2007 through the lows of March 2009, but still captured much of the upside since the lows.

In addition to smoothing out the Mr. Market's wild ride, McDonald's adds stability with a truly global business model. The company generates well over half its revenue from outside the U.S. I'm not smart enough to know which of the world's economies will be the strongest over the next few years, but I do know McDonald's will be there.

Why McDonald's? There are a number of companies that meet the two criteria listed. Procter & Gamble (NYSE: PG  ) with its global consumer products business and long dividend history, fellow fast food operator and recent Motley Fool 11 O'clock stock Yum! Brands (NYSE: YUM  ) with great opportunities for growth in China, and global soft drink powerhouse Coca-Cola (NYSE: KO  ) all jump to mind as great core stock candidates.

McDonald's edges ahead of the pack with the way it has used its menu to drive revenue. It pushed the low-cost Dollar Menu to draw consumers when the economy looked weakest and has added higher-priced, higher-margin premium products to keep those value customers coming back and bring in new customers to try smoothies, coffee drinks and premium burgers.

Risks
Like any stock, an investment in McDonald's carries some risks.

  • Governments occasionally talk about regulating or taxing the unhealthy menus common at fast food restaurants.
  • Commodity cost increases are outside McDonald's control. There is no guarantee the company will be able to pass cost increases along to consumers.
  • New product rollouts often have to go head-to-head with established players like Starbucks (Nasdaq: SBUX  ) coffee or Jamba (Nasdaq: JMBA  ) smoothies.
  • The stock has recently been setting all-time highs and is priced at a premium to the market. I believe the premium valuation is justified, but the company needs to continue executing well to maintain that valuation. A recent monthly sales report spooked investors expecting better numbers and resulted in a one-day drop of over 2%.

In sum
No stock is risk-free or perfect for every investor, but McDonald's offers investors a good income stream that's likely to keep growing, some protection against market downturns and good prospects to capture a big bite of bull market gains. That makes it an ideal core stock pick for many investors and those are some of the reasons that my Foolish colleague Jim Royal has called the stock a dividend play for a lifetime.

Interested in reading more about McDonald's? Click here to add it to My Watchlist, and My Watchlist will find all of our Foolish analysis on this stock.

Fool contributor Russ Krull owns shares of McDonald's, but no other companies mentioned. Coca-Cola is a Motley Fool Inside Value selection. Starbucks is a Motley Fool Stock Advisor pick. Coca-Cola and Procter & Gamble are Motley Fool Income Investor recommendations. The Fool owns shares of and has written covered calls on Procter & Gamble. Motley Fool Options has recommended a bull call spread position on Yum! Brands. The Fool owns shares of Coca-Cola and Yum! Brands. Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (27)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 23, 2010, at 9:12 PM, rayzur9 wrote:

    McDonalds. PEriod. thats all I can think in terms of excitement over an opportunistic company that turns coat against the US when promoting overseas. The food sucks, and is unhealthy, sort of like the perfect Icon of where we are today in the market and politics and the results of greed, just a bunch of half cooked fries and meat grease.

    I say thumbs down to a company that serves what McD's does, and the effects of it on people.

  • Report this Comment On September 24, 2010, at 3:52 AM, midnightmoney wrote:

    I agree wholeheartedly with rayzur. The company pushes unhealthy food and grossly underpays employees so that it can reward those who are surely less hard up, the stockholders. Yes, one can order a salad and smoothie (very possibly pesticide-laden liquid trash), and indeed one need not take a job there if not content with the wages, but couldn't mcdonald's do better on both fronts while also rewarding stockholders? The combination of just these two MORAL FAILURES makes the stock a stomach-turner for me. We talk about values in the plural in discussion outside of the stock market, yet the choice here is limited simply to value. What gives? Should the idea of core values (not) enter into our decision on buying core stocks? If the idea is simply to profit, entering into a life of crime would be a parallel and possibly more efficacious path. Can mcdonald's be defended on non-financial grounds?

  • Report this Comment On September 24, 2010, at 9:57 AM, DrRonPaul4Prez wrote:

    Rayzur9, Thank you for writing that. MCD is a fine investment if all you're looking at is the balance sheet, but I whole-heartedly agee with your comment. When money becomes more important than people that's a problem.

  • Report this Comment On September 24, 2010, at 5:38 PM, Eerkes wrote:

    how dare mcdonald's prey on innocent people by offering them unhealthy food, after all there is no possible way anybody would every have known it was unhealthy without reading this board

  • Report this Comment On September 25, 2010, at 12:32 PM, Mstinterestinman wrote:

    @ Eerkes Lmao well said

  • Report this Comment On September 26, 2010, at 10:13 AM, midnightmoney wrote:

    For me the question is more about whether I'd want a purveyor of heart attacks, abhorrent labour practices, and widescale environmental destruction to be the core of any part of my life. Most obviously know that the food is unhealthy. My question was, outside of providing shareholders a decent (though by no means not incomparable) long-term investment, what does mcd do for the world other than make it worse? Are they doing the right thing with their money so long as they're greasing our palms with an ever-heftier dividend? What about the poor suckers getting raked over the coals in developing economies. I'd much sooner see them receive an even marginal raise than the mcshareholders get another fat dividend rise, then poo-poo (as some here seem to do) the idea that there could be a core issue in investing other than individual profit.

    On a related note, I was intrigued by how quickly the mf advisor who recommended yum brands on the five o'clock stock was to point out that he himself never eats fast food. Why not? There seems to be this disconnect between what some will allow themselves to profit from but would never actually do, smoke, use or, in the case of fast food, ingest.

  • Report this Comment On September 27, 2010, at 8:08 AM, justdotit wrote:

    Where are all the Jambas in the Northeast? Let alone do we hibernate, we get hungrier in the wintertime. What better than a hot healthy or should I say healthier breakfast (than McDs) in the winter time to get you going in the morning...

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1310666, ~/Articles/ArticleHandler.aspx, 12/22/2014 3:46:14 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement