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An Unusual Take on McDonald's

10/06/2006 12:00 am EST

Focus:

Kelley Wright

Managing Editor, Investment Quality Trends

Yield-seeker Kelley Wright has a fresh perspective on an old-market stock. In his latest newsletter, he finds much to like about stalwart McDonald's Corp, including its current trading levels as well as its dividend payout.

"McDonald's Corp (MCD: NYSE) announced a dividend increase of 49%, to $1.00 per share. McDonald's has now quadrupled their dividend since 2002; spectacular is the only word that comes to mind. McDonald's has been a part of our model portfolio at Private Client since 2003, when its 2002 dividend increase catapulted the company into historic undervalued territory. We felt then and still feel now that McDonald's is misunderstood. Sure, the Golden Arches still pumps out the burgers and fries and provides welcome relief to stressed out parents with a mini-van full of kids; but that's just on the surface. We also see McDonald's as a REIT.

"Now before you start calling about MCD being a low-yielding stock and nothing like a REIT take a look at these numbers. We purchased MCD at $16 in mid-April 2003. The dividend was $.23 and the yield was 1.44%. At today's price of around $39 our capital has more than doubled and with a dividend of $1.00 our yield on purchase is 6.25%. Even when we factor in our second buy at $25 in mid-December 2003 we have an average cost of $20.50, which still represents almost a double in price appreciation, and

an average yield at purchase of 4.90%. The last time I checked, the yield on the 10-year Treasury was at 4.63% and the yield on the 30-year is about 4.90%, but I don't think the T-Bonds have delivered any doubles.

"As I write MCD has a total return of about 16% since January 1. In an even shorter time frame, MCD has returned just over 20% in our Strategy Lab portfolio at MSN Money since June 16th. The reason for highlighting McDonald's is two-fold. First, this is a text-book example of the benefit of buying high-quality undervalued stocks that consistently raise their dividend. Second, with all the hoopla surrounding the Dow Industrials flirting with their all-time highs, investors can get distracted from what is important; focusing on the market of stocks that meet our criteria as opposed to the stock market.

"One last note: We have been receiving calls about the offer to exchange McDonald's shares for shares in Chipotle, the MCD spin-off. McDonald's is a known commodity; Chipotle isn't, although its performance since the initial spin-off has been outstanding. Given McDonald's track record for capital appreciation and dividend increases, I would be inclined to stand pat with my MCD shares."

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