Sick of Volatility? Have Some McDonalds.
Paula is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Market volatility is high again. The Dow’s recent roller-coaster from above 13,000 to 12,000 and back up to 12,700 has investors scratching their heads and wondering what’s next. Meanwhile, the S&P volatility index (the "fear" index), stands at a three-month high, up nearly 33% since March.
This volatility is causing many investors to look at large-cap dividend stocks as a relative safe haven within the tumultuous equities world.
One of the best dividend stocks is McDonald's (NYSE: MCD). The company’s strengths include:
#1: A Wide Moat
McDonald's needs no introduction. (“McDonald's is a purveyor of fast-food…”) Everyone is familiar with what it sells, and the Golden Arches are among the most recognizable symbols in the world. Its brand loyalty is tremendous.
#2: A Steady Dividend History
McDonald's has paid steady, uninterrupted dividends since 1976. It has also increased dividend payouts every year from 1976 to 2010.
It doesn’t post token dividend increases, either. Its dividend increases are heft. For instance, the company posted an 11% payment jump in Sept. 2010, to 61 cents per share. It skipped a dividend increase in 2011, marking the first time in 34 years that the company didn’t post an increase. But it more than compensated by hiking the dividend another 9 cents per share in early 2012. Its current payout, 70 cents per common share, translates to a respectable 3.10% yield. That’s far better than what you’ll get with many bonds.
How does this dividend payout compare to other dividend-happy companies in the same sector? The S&P "Dividend Aristocrats" is a list of large-cap companies that have increased their dividend payout every year for at least the past 25 years. On this list, the largest company (measured by market cap) in the realm of "consumer discretionary" products is Family Dollar Stores (NYSE: FDO). Their dividend yield checks in at only 1.17%, with a P/E of 21. Clearly, McDonald's trumps, with a healthier yield and cheaper stock price.
#3: Strong Share Value
McDonald's seems to have been unfairly punished by a market that’s panicked about events in Europe. For the past 7 months – from December 2011 to April/May 2012 – McDonald's stock held fairly steady, hovering in the $97 - $99 per share range. Recent events have caused the stock to plunge to $90 per share. With a P/E of 16, this stock is a relative bargain.
#4: Recession-Proof Business
McDonald's manages to stay profitable through both recessions and bull runs. When the economy is charging at full speed, consumers don’t think twice about plunking down $5 for a meal. When the global economy contracts, people look for small, simple luxuries – like a 99 cent McDonald's ice cream cone – to entertain their kids. Need proof? McDonald's has seen revenue growth for the past three calendar years (2009 - 2011), despite the rough economy.
#5: Targeting a Frugal Coffee Niche
A few years ago, McDonald's rolled out its redesigned and chic “McCafe” concept, which stood as a clear play against competitor Starbucks (NASDAQ: SBUX). But these days, McDonald's is changing direction. Rather than compete for the same pool of coffee-drinkers, McDonald's is competing for dominance within a different niche. McDonald’s new marketing campaign advertises any size of coffee for 99 cents. This aggressive pricing strategy solidifies the company’s status within a niche of price-conscious customers. Luxury coffee drinkers will continue to buy venti no-whip caramel macchiatos at Starbucks while frugal coffee lovers will grab their 99-cent cup. And, while they’re in store, they’ll also order some hash browns and an egg McMuffin.
#6: Steady Global Growth
McDonald's announced that global comparable-sales growth is expected to be about 4%, which is in line with its normal rate of growth. Since 2008, its operating margins have consistently remained higher than 25%. With a debt-to-asset ratio around 35%, this company maintains a reasonable rate of leverage and steady, manageable growth.
#7: Market Dominance
Many analysts list Yum! Brands (NYSE: YUM) as McDonald's biggest competitor. Yum! Brands owns major fast-food chains such as Taco Bell, Pizza Hut, KFC, WingStreet and Pasta Bravo.
While these are "competitors" in the traditional sense of the world -- they also occupy the fast-food niche -- they serve a totally different customer segment: people who want to eat pizza, tacos, wings and pasta. McDonald's doesn't serve any of these foods.
The two major fast-food restaurants that compete in the burger niche, Burger King and Wendy's, are small players compared to McDonald's. Privately-held Burger King has about 7,000 locations, while privately-held Wendy's has 6,600 locations. This is roughly only one-fifth as many locations as McDonald's carries (it has more than 33,000 locations). Clearly, McDonald's is the market leader.
The biggest drawback to investing in McDonald's is the uncertainty about the new CEO. In March, longtime CEO Jim Skinner announced that he would retire effective at the end of June. Skinner led the company for 41 years. Current President and COO Don Thompson will take over as CEO, and while there is no reason to doubt Thompson’s ability to lead the company, the old adage remains: only time will tell. Any time of CEO transition introduces a measure of uncertainty into a company’s future performance, and this uncertainty must be factored in.
On the whole, I’d say that with a 3.1% dividend yield and a P/E of 16, McDonald's remains a stable, long-term investment. It won’t skyrocket the way Apple stock did, so don’t buy it if you’re looking for freakishly wild growth. If you have an appetite for volatility and risk, opt for some other stock.
But if you want a solid company that can live in your portfolio for decades, McDonald's is a great choice.
PaulaPant has no positions in the stocks mentioned above. The Motley Fool owns shares of Starbucks. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.