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.

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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.

 

Drawdown risk:

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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