As portfolio manager of Tier 1 Investments, a Motley Fool Rising Star Portfolio, my mission is to identify the best businesses in the world and invest in them at attractive prices. One of the ways I do that is by searching through hundreds of companies and adding a select few to my watchlist. Then from my watchlist I select what I believe to be the best of the best to add to the Tier 1 portfolio. Today I'm adding McDonald's
McDonald's is an example of a once-struggling company that instituted a turnaround plan that -- get this -- actually improved the company's operations. McDonald's has made impressive progress since it instituted its "Plan to Win" to renovate its stores and improve its sales and growth in 2003. The restaurant giant's profit margin is now to 20%, up from less than 6% in 2002. And return on capital is just under 20%, up from 8.5%.
During that time, McDonald's also supersized its dividend. In 2002, McDonald's paid $0.24 per share in dividends. This year, the company is on track to pay 10 times that amount. I don't expect that growth to continue for the next 10 years, but I believe that with its growth prospects and a payout ratio of less than 50%, McDonald's can increase its dividend by more than 5% for the foreseeable future.
International expansion will fuel this growth. In China alone, McDonald's plans to open 700 new stores by 2013. And the company's sales are still growing in the United States, thanks to new menu items, such as oatmeal and high-end coffee drinks.
I also like its defensive nature. The company (and stock) performed well during the recession, when consumers traded down to less expensive meals. In addition, the company's 3% dividend and share-buyback program will continue to support the stock.
What I'm watching
McDonald's share price has run up by more than 25% since James Early and I recommended the stock to Income Investor members in February, so I'll be looking to add McDonald's to my Tier 1 Investments portfolio on a pullback in its stock price. But until then, I'd love to hear your thoughts on McDonald's. Click here to join the Tier 1 discussion board. To add McDonald's to your own watchlist, click here.