10 Core Stocks for Your Portfolio: Update on McDonald's

Four months ago, we selected burger chain McDonald's (NYSE: MCD  ) as a stock worth considering for a core portfolio holding. Key characteristics for this core selection included:

  • 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 the ones for this pick and together they add up to a stock with a potential holding period of forever.

Here's a current business snapshot, along with where the metrics stood in September 2010.

Company Name

McDonald's

One-sentence statement of operations

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

Recent price

$73.28 (was $75.13)

Market cap

$77.42 billion (was $80 billion)

Forward P/E (2011 EPS)

13.35 (was 15.3)

ROE

36.7% (was 36.3%)

Source: Yahoo! Finance.

Very little has changed. Shareholders collected a dividend, saw the share price run up to all-time highs of about $80, and then watched as it pulled back. Total return over the four months? A loss of about a buck per share while market benchmarks climbed. Ouch.

A significant concern going forward is pressure on margins due to rising food prices. During the most recent earnings conference call, management hinted at price increases to offset at least part of the higher commodity costs. McDonald's size and experience dealing with commodity price swings should put it in a better position to deal with higher food prices than competitors and strong brand recognition provides pricing power.

There are a number of strong contenders for a core holding. Soaps and other household consumables never go out of season. That combined with a long dividend history and global footprint puts blue chip Procter & Gamble (NYSE: PG  ) in the running. Yum! Brands (NYSE: YUM  ) offers a yummy yield, price points that work in any economic cycle, and great growth potential in China. Coca-Cola (NYSE: KO  ) is one of the few companies that can match the Golden Arches' recognition around the world.

The deciding factor in picking McDonald's over the others was its ability to tweak the menu to drive traffic. That's still the case. Specialty menu items and McCafe offerings in restaurants around the world along with McRib in the U.S. were credited with driving traffic last quarter.

Investors will need to keep tabs on commodity price pressure and price hikes to see if margins at the Golden Arches get squeezed. All things considered, the company is still poised to continue serving up bigger helpings of juicy dividends year after year.

Fool contributor Russ Krull owns shares of McDonald's but no other companies mentioned. Coca-Cola is a Motley Fool Inside Value selection. Coca-Cola and Procter & Gamble are Motley Fool Income Investor picks. The Fool owns shares of Coca-Cola and Yum! Brands. The Fool has a disclosure policy.


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