This Stock's Still a Dividend Play for a Lifetime

A year ago, I highlighted McDonald's (NYSE: MCD  ) as the dividend play for a lifetime. Since then, the stock has climbed 29% (dividend-adjusted) -- vastly outperforming the S&P, by more than 25%. And the company boosted its payout by 11% in September last year. So with all that, is McDonald's still a buy?

In a word, yes!

To the future and beyond
Much remains the same about McDonald's from last year. It's still growing its massive chain of stores, still has its hidden assets, and still is cranking out great same-store sales, even in the midst of a dour economy. Here's how its comps -- sales growth at stores open for more than one year -- look over the last four quarters in comparison to peers:

Company

Latest Quarter

Latest Quarter-1

Latest Quarter-2

Latest Quarter-3

McDonald's 5.6% 4.2% 2.3% 6.0%
Jack in the Box 3.2% 0.1% 1.1% (4.0%)
Chipotle (NYSE: CMG  ) 10.0% 12.4% 12.6% 11.4%
Starbucks (Nasdaq: SBUX  ) 8.0% 7.0% 7.0% 8.0%

The Golden Arches has put in a solid performance over the last year, even against fast-growing concepts like Chipotle (a McDonald's spinoff). With that type of performance from a mature company like McDonald's, investors have nothing to be ashamed of.

And McDonald's still has massive growth opportunities in front of it. The biggest, of course, is China. The company plans to bump up store count some 50% by 2013, to 2,000 outlets. Just 2,000 stores in a country of 1.3 billion? That's just one store for every 650,000 citizens. Compare that to the U.S., where the company supports a store with every 22,000 people. There's still a huge runway for growth in the Middle Kingdom.

Peers such as Starbucks and Yum! Brands (NYSE: YUM  ) are also targeting China for great growth, with Yum! envisioning 20,000 locations for its brands, against some 4,000 locations currently.

And then there's India, where McDonald's has only a few hundred locations in a population almost as large as China's. In fact, the company has said that it could support 50% or 60% sales growth on the subcontinent, if the infrastructure were as good as China's. There is also still plenty of opportunity in Latin America, where McDonald's licensee Arcos Dorados (NYSE: ARCO  ) is setting up restaurants.

Waiter, the dividend please...
All of those growth opportunities should provide the company ample room to raise its dividend. The stock currently yields 2.8% -- not huge, but it's growing very quickly.

Including last year's 11% bump, the dividend has soared 29% on average over the last five years. I expect another dividend boost next month.

The great thing about McDonald's dividend is that you can count on it growing year after year. The company pays out just 47% of its net income as dividends, leaving it plenty of room to raise the divvie. The company has also bought back $3.5 billion in stock over the past four quarters, returning all its free cash flow to shareholders and then some. Those actions are fulfilling the company's promise to return all free cash flow to shareholders as either repurchases or dividends, a commitment that the company recently reiterated in its annual report. All that has led our Income Investor newsletter to recommend the stock to subscribers.

McDonald's reliability on the dividend front is paramount. While I like mortgage REITs Annaly Capital (NYSE: NLY  ) and Chimera Investment (NYSE: CIM  ) right now because of their huge dividends, I have to keep a sharp eye on them. When macro-conditions change (e.g. interest rates go up), these companies will be hard-pressed to continue their gaudy dividends. Still, I like them now, because the conditions are still favorable. But for McDonald's, I don't have that concern. The company can keep pushing out great comps quarter after quarter and bumping that dividend year after year.

Check out McDonald's performance on a five-year stock chart and you'll be hard-pressed to find the latest market correction or even the financial crisis of 2008 and 2009. That type of low volatility is testament to the company's strength, making it a great retirement pick. At 18 times earnings, the stock is not immediately cheap, but such solid stocks rarely are, and as we've seen, McDonald's has the ability to outperform in tough times.

Foolish bottom line
McDonald's has two other stores of hidden value to keep its dividends growing, and you can read more about them in our special free report "13 High-Yielding Stocks to Buy Today." Plus, you'll get the names of 12 other high-yield plays. Hundreds of thousands have requested access to this special report, and now you can access it today at no cost. Simply click here -- it's free.

Jim Royal, Ph.D., owns shares in Annaly and McDonald's. The Motley Fool owns shares of Chimera, Annaly, Yum! Brands, Starbucks, and Chipotle. Motley Fool newsletter services have recommended buying shares of Chipotle, McDonald's, Yum!, and Starbucks. Motley Fool newsletter services have recommended creating an iron condor position in Chipotle. 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 (15) | Recommend This Article (75)

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 August 22, 2011, at 4:27 PM, NovaB wrote:

    I don't really want to burst anyone's bubble but Annaly has been paying me those dividends for 10 years. I don't expect that will change any time in the near future, either.

  • Report this Comment On August 22, 2011, at 5:29 PM, TMFRoyal wrote:

    Hi, NovaB,

    I think Annaly's got a good run left, too, as I mention in the linked article.

    http://www.fool.com/investing/dividends-income/2011/08/10/ru...

    But its dividends will come down in time, while I don't see that happening for McD.

    Foolish Best,

    Jim

  • Report this Comment On August 22, 2011, at 6:56 PM, DaytonFlyers wrote:

    CHipotle is not a spinoff of McDonalds

  • Report this Comment On August 22, 2011, at 7:29 PM, imsodopey wrote:

    McDonalds, at one time, was in an investment partnership with Chipotle so it could go national.

  • Report this Comment On August 22, 2011, at 7:35 PM, The1MAGE wrote:

    McDonald's was a "minority" investor in Chipolte, and in 2006 they decided to divest out of all their non-McDonald's investments to focus on building Micky-D's, and Chipolte was put out as in IPO.

    They put in $360 mil over 7 years, and pulled out $1.5 billion, so that might have been a good investment for them.

  • Report this Comment On August 22, 2011, at 7:37 PM, 102971 wrote:

    When you make such a terrible mistake in referring to Chipotle as a spin off of McDonalds it makes me question everything you write. Chipotle is not a newcomer to the fast food market; it has been in business for nearly 20 years and has over 1100 restaurants. Please check your facts before you make stupid errors.

  • Report this Comment On August 22, 2011, at 7:41 PM, 102971 wrote:

    If what 1MAGE says is true, Chipotle probably was a better investment than McD's over the 7 years up to 2006.

  • Report this Comment On August 22, 2011, at 7:46 PM, TMFRoyal wrote:

    Hi,

    Chipotle certainly was a spinoff of McDonald's. McD's did an IPO of Chipotle about five years ago and then spun the rest off to shareholders subsequently:

    http://www.businessweek.com/bwdaily/dnflash/sep2005/nf200509...

    Foolish Best,

    Jim

  • Report this Comment On August 22, 2011, at 7:50 PM, TheDumbMoney wrote:

    Dear People of the InterWeb:

    Please in the future take three seconds to use Google (or Bing) before pasting in moronic, fact-devoid nonsense. You may be anonymous, but your electronic handle is now firmlly labelled at least in this fool's mind with a pejorative adjective describing your intellectual ability.

    Here is the Forbes article on the 2006 spin-off, by McDonalds, of its former subsidiary, Chiptotle:

    http://www.forbes.com/2006/01/19/mcdonalds-chipotle-yum-cx_s...

    Here is USA Today: http://www.usatoday.com/money/industries/food/2006-01-22-chi...

    A bajillion other sources on the web reference this spin-off as well. Seriously, this is not rocket science, people: don't post things if there is no factual basis for what you are saying! Why do you people do this? I just don't get it. It's not like it's hard to rebut, and it's not like you have any decent reason, in this case, for making your absurd, fact-devoid statements.

    Go in peace, people, but please don't vote, don't run for political office, and please don't marry my daughter.

  • Report this Comment On August 22, 2011, at 10:12 PM, skypilot2005 wrote:

    On August 22, 2011, at 7:50 PM, dumberthanafool wrote:

    "Go in peace, people, but please don't vote, don't run for political office, and please don't marry my daughter."

    ditto.

    Sky Pilot

  • Report this Comment On August 23, 2011, at 1:49 AM, shoemaker17 wrote:

    McDonald's sold its stake in Chipotle because the higher ups didn't want to franchise their restaurants. Why doesn't Mcdonald's just buy Jack in the Box, spin off the burger chain and keep Qdoba? Qdoba franchises. I know it's not Chipotle, but it is still pretty good.

  • Report this Comment On August 23, 2011, at 1:00 PM, mikecart1 wrote:

    No one can mess with my dividend team: MO, NLY, CIM. McDonald's was good to get in 2009. Today it is fairly priced. It is about to turn into the next JNJ if you ask me. Until MCD can create the next big thing or merge with something else, they will just be slow and steady. Why get 3% dividends when you can get over 10% with NLY and CIM?

    It's like working at 2 jobs but only going to 1. Those quarterly payments put a grin on me chin! :o]

  • Report this Comment On August 23, 2011, at 7:27 PM, The1MAGE wrote:

    Here is the article I used as reference for my post:

    http://www.bnet.com/blog/business-strategy/chipotle-grills-s...

    This is an interview with the person who started the company. I also found the link posted by the author.

    I always research before I post anything, and used to always include links until I realized nobody ever actually read the links, and even ignored the fact that I posted them. (Different forum.)

    I also

  • Report this Comment On August 26, 2011, at 3:42 PM, TMFKopp wrote:

    Re: The Chipotle controversy here...

    I always find that the best place to go is the company's own SEC filings...

    From MCD's 2000 10-K:

    "The Company operates primarily in the quick-service hamburger restaurant business. Beginning in 1999, the Company also operates other restaurant concepts: Aroma Cafe', a small chain of coffeehouses serving prepared sandwiches and pastries in the UK; Chipotle Mexican Grill, a fresh-mex grill located in the United States serving gourmet burritos and tacos; and Donatos Pizza, a restaurant business located in the United States that sells pizza, subs and

    salads."

    http://www.sec.gov/Archives/edgar/data/63908/0000950131-00-0...

    That year, and subsequent years, Chipotle's results were consolidated in MCD's. So far sounds like a spin-off...

    How about CMG's filings? Here's from its most recent 10-K:

    "Our business was founded in Colorado in 1993, and McDonald’s Corporation made a series of equity investments in us beginning in February 1998, becoming our majority shareholder in 2000. We completed our initial public offering in January 2006. McDonald’s sold a portion of its interest in us in the initial public offering, sold an additional portion of its interest in us in a secondary offering in May 2006, and disposed of its remaining interest in us in an exchange offer to its shareholders that was completed in October 2006."

    http://www.sec.gov/Archives/edgar/data/1058090/0001193125110...

    Yeah, certainly sounds like a spin-off to me...

    Great article Jim!

    Matt

  • Report this Comment On August 27, 2011, at 1:09 AM, luizlinjit wrote:

    Boa noite e muito obrigado, eu adoro esse grupo de empresas, eu me divirto desejando a paz mundial.eu só não aprendi ainda a ganhar um pouco de dinheiro, para a minha subsistência eu sou aposentado buscando uma renda extra eu me aposentei como gerente de vendas eu amo vender eu comecei agorá com a internet mas eu estou amando só não tenho ainda a pratica mas estou chegando lá, eu tenho informações que tenho um valor, só que eu anda não recebi, sé poder eu agradeço se não poder eu também agradeço da mesma forma peço ajuda estou doido para o trabalho e divulgar as empresas parceiras do grupo. muito obrigado equipe sejamos todos muito felizes, um forte abraço e um beijo no coração fiquem com o Pai "OBRIGADO"

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: 1542285, ~/Articles/ArticleHandler.aspx, 10/1/2014 6:47:20 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