A Big Mac Attack

01/05/2007 12:00 am EST


Charles Carlson

Editor, DRIP Investor

Revisiting an old favorite, dividend reinvestment pro Charles Carlson, finds several reasons to get back on board. Here, he discusses the fast-food leader's dividend strategy that is sure to add 'pounds' of green to investors' pockets...

"I used to own McDonald's (MCD NYSE) several years ago but sold the stock after years of sluggish performance. My sale, it turns out, was a bit premature. The fast-food giant has staged an impressive turnaround, with the stock up 77% since the end of 2003, driven by new product offerings, quality improvements, and overseas growth.

"2006 per-share profits should be a record, and long-term growth prospects are solid. The stock represents the type of large-cap investment that investors should find attractive in the current market environment. DRIP investors can nibble on the stock at current prices and step up purchases on pullbacks below $40.

"McDonald's has more than 30,000 restaurants in more than 100 countries. And some 70% are owned and operated by independent local men and women. Same-store sales growth--a good measure of the health of a restaurant chain--has been impressive. Systemwide sales for McDonald's restaurants worldwide increased 10.5% in November, or 7.2% in constant currencies, while same-stores sales grew 6.2%. In the US, comparable sales increased 5.1%. Extended hours and strong breakfast business boosted results. Same-store sales jumped 8.4% in Europe and 4.3% in Asia/Middle East/Africa.

"The strong sales should fuel continued growth in profits. The 2006 consensus earnings estimate is $2.42 per share, up from $1.97 in 2005. McDonald's solid earnings growth in recent years has fueled big dividend increases. The firm has increased its dividend every year since paying its first dividend 30 years ago and recently boosted the dividend 50% to an annual rate of $1 per share.

"Since 2002, the dividend has more than quadrupled. The stock's current yield is 2.3%, above the market average. Additionally, McDonald's has used its cash flow to buy back stock. The firm anticipates total shares outstanding at the end of 2006 to decline by about 5% from year-end 2005. Overall, McDonald's expects to return at least $10 billion to shareholders through dividends and share repurchases in 2006 through 2008.

"McDonald's, trading at 18 times the 2006 consensus earnings estimate, does not seem expensive given the company's market-leading position, earnings-growth prospects, and attractive yield. True, calls for healthier restaurant food and even laws governing the use of trans fats will impact fast-food chains periodically. Still, McDonald's has ample operating and stock price momentum, and the stock should outperform the overall market over the next 12-24 months. McDonald's has a direct-purchase plan. Minimum initial investment is $500."

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