Do you know somebody who doesn’t know McDonald’s? With more than 75 years of history and 36 000+ locations all around the world McDonald’s is the largest chain of fast food restaurants.
Company owns restaurants as well as runs franchising model. Trend is to refranchise restaurants. Moreover around 8 000 U.S. locations are fully owned. Capital needs are not so high – few billions USD yearly – mainly for new openings and refurbishments.
2016 growth targets:
- 3-5% system wide sales growth
- 5-7% growth in operating income
- ROIIC – high teens
Business model is stable. During recession of 2008-2009 company increased financial results. This paradox can be explained by perception of McDonalds – selling cheap food. This is true but not on every market – in some Emerging Markets McDonald’s is not as cheap, but while US is dominant share of revenues it doesn’t matter.
As it comes to financials (estimates):
Market cap ~ $110B
Net debt ~$15B
Payout ratio ~73%
ROE ~40% (!!)
Beta = 0.8
Dividend yield 3% + buyback around $5B – $6B per year = ~5% buyback yield = together around 8% distribution to shareholders (!)
Estimated valuation ratios:
EV/EBITDA = 14.3
P/E = 24.2
MCD is one of The Dividend Aristocrats – paying from 1977. Share price is currently around $120, which is a record high level. 3% dividend yield + big share buyback is attractive in my opinion, but on the other hand valuation is demanding and way above historical averages.
Share price of MCD is at all-time highs after an impressive rally of 20+% for the last half year. Business is quite stable and apart from company’s internal crisis in 1999-2003 drawdowns are rather low. On the other hand valuation is demanding. Look how awesome performance was in 2008-2009.
Summing up, I have mixed feelings about McDonald’s. From dividend & buyback yield perspective I would buy shares but valuation and all-time high level makes me reluctant. I think I will wait for drawdown to around $100. Was there any reason that valuation has changed by 20% for last few months?
Disclaimer MCD – no position