McDonald's (NYSE:MCD)

 

Commonly called McDo, McDonald's is the world's largest fast food chain. It has more than 32,000 branches and 400,000 employees in more than 110 countries. Around 70% of McDonald's restaurants worldwide are franchised. The concept was created in 1940 by Richard and Maurice McDonald. Is it still necessary to present its famous products all over the world, such as the Big Mac or the Cheese Royal? MCD is one of the few rare companies to offer value while being an interesting growth driver.

The company experienced a dramatic turnaround in 2003, driven by a two-pronged strategy. In the United States, McDonald's increased sales by renovating existing branches, increasing menu selection and extending opening hours. Internationally, McDonald's grew very quickly, opting for franchising. Despite the company's already enormous size, sales literally exploded.

International operations drive profit growthThe rising middle class, particularly in emerging markets like China, India and Latin America, represents a huge opportunity for McDonald's. The company is well established in Europe, Asia/Pacific Islands, the Middle East and Africa. Its growth in Europe is mainly driven by France, Germany and the UK. In Asia, senior management has indicated that there is significant potential in the Chinese market. The company has adapted its menus to local cultures, such as Mac Teriyaki in Japan, Filet-O-Fish variations in China, and lamb instead of beef in India.

McDonald's International Revenue

Geographic region	Percent of total revenue
UNITED STATES	35%
France, Germany, United Kingdom	21%
Rest of Europe	14%
Australia, China, Japan	8%
Rest of Asia, Middle East, Africa	8%

The average long-term dividend yield stands at a very decent 3.25%, while annual growth in distributions is sustained, with 15,26%. McDonald's has increased its dividend for 35 consecutive years. Despite the performance and sustained growth, the distribution ratio remains perfectly acceptable, at 48.01%, which leaves the company with good room to maneuver in the event of a difficult passage, and ensures the progression of the dividend in the future.

The volatility, with 16.57%, is higher than that of our portfolio, but still correct. This is mainly due to the significant progression of the McDo price. We can also see below that the title has significantly outperformed the market for many years : +25'000% since 1970... happy are the enlightened who bought shares at the time and especially who kept them! Despite this volatility and this prodigious performance, the title is not very sensitive to market variations, with a beta of only 0.43. The company indeed manages to hold its own in both recessionary and growth phases.

 

McDonald's sensitive to relative dollar strength. Although the company is based in the United States, McDonald's generates over 60% of its overseas business. As other currencies strengthen against the dollar, goods sold in foreign markets become more valuable in USD terms, thereby improving revenues. A strengthening dollar, on the other hand, reduces the value of overseas sales. This finding translates into a strong inverse sensitivity to changes in the greenback, with a $risk of -0.79, a fall in the dollar being accompanied in principle by an increase in the value of the security in CHF.

MCD is an exceptional title, which has all the qualities one would look for in a dividend payer. The yield, the growth and the history of the dividend, the distribution ratio, the volatility, the sensitivity to the dollar... all the lights are green.

If we had to put a single downside to this beautiful picture, it would be the impressive increase in the share price. However, the fundamentals remain good and the valuation is still affordable, even if the PER is a little high at 18.90. The current yield is also interesting, with 2.80%.

In view of these figures, our analysis model considers that McDonald's is still an interesting buying opportunity.

Sources: Wikinvest, Swissquote, Yahoo Finance, dividends.ch