A Tasty Dividend Stock

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Shares of McDonald's (NYSE: MCD) have delivered lackluster returns over the last year as the company faced a tough economy and increasing competition. But things are starting to look better, comparable sales were pretty strong in November, and the return of the McRib should help in the short term. The company is still an industry leader with strong competitive advantages and an attractive dividend yield, so maybe it's time to consider adding some McDonald's to your portfolio.

A Tough Business

The fast casual industry has been stealing market share from traditional fast food restaurants. Chipotle Mexican Grill (NYSE: CMG) is the poster boy for this new trend, and the company has been very successful with its “food with integrity” approach to Mexican cuisine, selling burritos, tacos and salads made from higher quality ingredients than in typical quick service restaurants.

Chipotle is a tad more expensive than McDonald's, in the area of $10 for a typical meal versus $8 at Mc Donald's; but customers seem to think the price difference is justified, as Chipotle has been rapidly expanding its sales over the last years.  Fast casual food means better food quality while maintaining the basic speed and experience of the fast food industry, an attractive proposition which will be a challenge for McDonald's over the next years.

On the lower end of the price spectrum, Wendy's (NASDAQ: WEN) has recently announced that it’s planning to increase its focus on value products next year. The company is planning to introduce a menu of 99-cent items, which is clearly targeted at increasing competitive pressure against McDonald's and its Dollar Menu.

Other competitors like Yum! Brands (NYSE: YUM) have also stepped up their efforts lately. Yum is well ahead of McDonald's in China, a market with exciting growth opportunities in spite of recent economic headwinds. The company is also trying to reinvigorate its Taco Bell business with its new Cantina Bell concept, which is off to a strong start so far.

A Strong Company

No business is immune to competition, and McDonald's has been feeling the pressure with uninspiring growth rates lately. But the company has been able to successfully face the competition through the decades, and there is no reason to believe it can't do it again one more time. After all, McDonald's hasn't lost any of its competitive advantages.

The company owns the most recognizable brand in the industry, it has an invaluable asset in the privileged location of its stores around the planet, and scale advantages are another big plus for McDonald's versus the competition. Besides, the company operates nearly 80% of its business via its franchise and affiliate system, which generates superior profitability and lower capital expenditures.

McDonald's pays a juicy dividend yield of 3.5%, and the company has consecutively increased its dividends in each of the last 35 years, through all kind of economic conditions and competitive challenges. Nothing like a growing dividend to reflect fundamental strength and a solid financial condition, and further dividend growth should also be very helpful in terms of supporting the stock price over the coming years.

Better Times Ahead

A weak economy and rising competition have produced disappointing sales at McDonald's over the last months, but the company seems to be back on track in November, as comparable sales increased by a better than expected 2% in the month. Better yet, the return of the McRib should generate a nice boost to sales over the next weeks.

On a longer time frame, the company has been smart in launching its McCafé business, increasing store profitability and providing new ways for expansion. Starbucks (NASDAQ: SBUX) is the industry pioneer in the specialized coffee business, and McDonald's is capitalizing the trend by positioning itself as the lower price competitor.

McDonald's probably won't do much harm to Starbucks, since both companies target a different kind of consumer. But just like Starbucks is the premium player, McDonald's is profiting from its geographical presence to become the value alternative in the coffee business, especially in emerging countries were the opportunity is underpenetrated. Besides, McCafé is diversifying the business away from hamburgers and other fatty foods, providing access to more health conscious customers.

Bottom Line

McDonald's has had a tough 2012 due to factors like economic headwinds and increased competition. But the company is as solid as ever, and things seem to be improving lately. Maybe it’s time to grab this tasty dividend yield while it’s still available at a discounted price.


acardenal has no positions in the stocks mentioned above. The Motley Fool owns shares of Chipotle Mexican Grill, McDonald's, and Starbucks and has the following options: short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend Chipotle Mexican Grill, McDonald's, and Starbucks. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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