McDonald's (MCD): A Burger with Extra Dividends

The world’s biggest restaurant chain is on of the Dow’s leading dividend payers. McDonald’s (MCD) yields a 3.08% dividend at current prices. The $76 billion company, operating in over 100 countries (there are more than 200 in the world), is a strong candidate for the income-seeking investor.

Investing in stocks that pay high dividends is an effective way for the conservative investor whose concern is mainly with the preservation of capital. When investing for a high dividend yield, the most important consideration for the investor is the sustainability of such dividends. Hence research into the underlying dividend payer is crucial.

In 2009 McDonald’s paid a $2.05 dividend (dividends are paid quarterly) which was 25% higher than 2008. That boost came despite the company only raising net income 5.5%. The “Golden Arches” has consistently paid a dividend since 1976 and given the company’s global expansion ambitions (as mentioned it’s only really penetrated half of the world’s countries) is likely to at least maintain and probably raise the dividend for the considerable future.

McDonald’s (MCD) trades on a PE ratio north of 16 and generated a return on equity of 32%. The company has a total debt to equity ratio of 75%, which is normal for this kind of business and a price to cash flow of about 14 times. Due to the nature of the strength of the brand and the competitive advantages the company possesses, it trades at a premium to competitors in terms of price to book and price to sales. This is also because McDonald’s (MCD) has a net profit margin about double that of the industry in general.

Last year the company paid out 50% of earnings in the form of a dividend, and this ratio has been rising since 2005. The market is expecting McDonald’s to consistently raise earnings in the medium term, and given the business model’s value proposition and push into new global emerging markets, I agree that earnings are set to rise.

This bodes well for the dividend, which has not seen a decline since it started in 1976. The dividend has increased 88,609% since the first one in 1976, giving an idea of the growth the company has seen. Since 1990 the McDonald’s (MCD) stock price has increased 3180%.

Consumer brand names that are global in nature, are fairly valued, have a long history of paying increasing dividends, and are expanding into new markets, are prime candidates for the income-seeking investor. The McDonald’s dividend is almost as secure as a bank savings account, but yields over 3%.

It’s a no brainer, really.