Is McDonald's a Stock for the Long Term?

Being able to retire rich, or at least comfortable, is the goal of almost any investor. However, it's much easier said than done. In a recent Wells Fargo survey, respondents between the ages of 50 and 59 said that they had, on average, about $29,000 saved up. With pensions all but gone, and Social Security targeted for cuts in the future, it's hard to count on anyone but yourself. But $29,000 isn't going to cut it for most people, so you've got to get involved in the stock market in order to grow that nest egg. Getting in the game is the easy part; choosing the right stocks is the hard part.

Making prudent decisions
Generally speaking, I look for four traits in a retirement stock:

  1. Valuation: Investors of all ages want to make sure they're not overpaying for a stock, but this matters even more in retirement. Retirees don't have the long time horizon that younger investors have, so it's essential to make sure you don't overpay in the short term.
  2. Dividends: Most retirees need a combination of both growth and income, as they'll be depending more and more on their portfolio to help with everyday expenses. Companies that pay dividends not only offer immediate income, but they've also proven to outperform nonpaying dividend companies over long periods of time.
  3. Growth: Investors love dividends, but everyone wants to see their stocks rise over time. Growth can be as big a part of your portfolio as a steady dividend. It's important to note that you don't need a high-flying stock that's going to shoot to the moon; a company that can grow and outperform the market is hard enough to find, so steady growth is highly covetable.
  4. Low volatility: Retirees want to invest in great growth stocks just as much as anyone else, but they also want to be able to rest well knowing that their portfolio won't be taking them on a roller-coaster ride. At the end of the day, most retirees would rather own a sturdy company that lets them sleep at night than a company that whips up and down with the gyrations of the market.

Although some companies are definitely more geared toward retirees, which companies you choose to invest in will be dictated largely by what you already have in your portfolio. Small, mid, and large caps can all play a role in your investing strategy, so I chose to evaluate all varieties of stocks in this regular series.

So how does McDonald's stack up?
In order to check out the valuation of McDonald's (NYSE: MCD  ) , we don't want to look at only its P/E ratio of 17.2. That may seem expensive, but really we don't know without looking at the ratio in historical context. Over the last five years, McDonald's average P/E ratio has been 20.1, which is greater than the current ratio. This suggests that investors could be seeing an opportunity to buy McDonald's on the cheap right now.

McDonald's dividend is 3%. This is tremendous; not only does McDonald's pay a dividend, but it pays more than the average company in the S&P 500.

Next, we want to ensure that McDonald's stock has the ability to rise over the next five, 10, or 20 years. A company that's growing its net income has the best possible chance to see its share price rise over time. Of course, we can't predict the future, but we can look back to get an idea of how the company has performed in the past in order to try to ensure future earnings growth. Over the past five years, McDonald's has grown its net income by 15.2% annually. Fortunately, McDonald's has been able to grow its earnings over the past five years, and that's pretty significant considering all of the market turmoil in the last few years. Of course, this doesn't mean that growth will continue, but it's a great sign that the company can prosper in the face of difficulty.

One of the best measures of volatility is called beta. Beta measures the impact that the movement of the stock market will have on a particular stock. For instance, a beta of 1.0 signifies that McDonald's will move in tandem with the market; a beta of 2.0 means that the stock will move up twice as much as the general market, and vice versa. In this particular case, McDonald's has a beta of 0.5, which is pretty low. Generally speaking, I like to see a beta below 1.2 for retirees. In this case, McDonald's fits the bill.

Let's look at the competition
We've taken a look at McDonald's, and maybe you think it's passed all the tests, or maybe you just don't feel comfortable with the results. Either way, it's beneficial to see how a company stacks up in its industry, because it's just as important to understand a company's competitors as it is to understand that particular company. Here are McDonald's stats when compared to three of its closest competitors:

Company

Current P/E

Dividend Yield

5-Year Net Income CAGR

1-Year Beta

McDonald's 17.2 3.0% 15.2% 0.5
Yum! Brands (NYSE: YUM  ) 23.0 1.8% 8.7% 0.9
Wendy's/Arby's Group (NYSE: WEN  ) N/M 1.7% (49.5%) 1.1
Darden Restaurants (NYSE: DRI  ) 15.7 2.5% 6.6% 0.9

Source: Capital IQ, a division of Standard & Poor's.

Each company has traits to like and traits left to be desired. Either way, it's beneficial to look at the industry picture and not just McDonald's in isolation.

Of course, I can't decide for you whether this is the best stock for retirement, but it has passed 4 of the 4 tests, which is pretty impressive. It doesn't necessarily mean this stock is a slam-dunk, but it has shown its ability to reward shareholders and that means it could have a place in your portfolio.

Interested in adding any of the companies above to your watchlist? Click below to get the latest commentary and analysis.

Worried about which stocks you should be tossing out of your portfolio and which ones should stay? Click here to read "Toss These 3 Stocks Out With the Trash."

Jordan DiPietro owns no shares of the companies mentioned here. The Fool owns shares of Wells Fargo. The Motley Fool owns shares of Yum! Brands. Motley Fool newsletter services have recommended buying shares of McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (8)

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 June 16, 2011, at 2:06 PM, ajaykc wrote:

    Its dangerous to hold anything for forever unless you are Warren Buffet and you bought it at $20. So at this level, its a sell. It will go down really quick when it breaks so leave it before big guys get out of this name.

  • Report this Comment On June 17, 2011, at 9:00 AM, dunkmaster wrote:

    when it "breaks"?...and goes where?...MCD is not gold or corn...it is not a cyclical paper company or GM...it will go up with the S&P and down with the S&P though not as much generally in either a bear or bull market.

    the company is managed well..is making healthy profit in a recession...has a business model that works on just about every continent ...etc etc etc..it is not going to "break" unless the whole world starts eating salad for lunch or all the management dies in a plane crash.

    why WOULD it break?

    "leave right before the big guys get out"?...ba ha ha ha.....oh...don't forget to tell us to buy low and sell high...

  • Report this Comment On June 21, 2011, at 12:04 PM, concealedweaponR wrote:

    mcdonalds is the king long hold. i cant believe the first post saying its a sell. i plan to buy all my life and never sell the shares ever. the only other company id be so confident in is coke

  • Report this Comment On June 21, 2011, at 12:07 PM, concealedweaponR wrote:

    mcdonalds was selling for the same valuation , even higher 10 years ago and look what it wouldve gained for us since then. awesome company

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