All valid thoughts and again, all reasons enough to still want to kick myself for not buckling down and investing in this fast food giant. In addition to these thoughts, I have presented below two reasons why McDonald’s Corporation (NYSE:MCD) is probably a good buy at any price, but even more so after its recent fumble.
1. Dividends: I’m not attracted to dividends, you’re probably not attracted to dividends, but we all like getting paid, and in addition to shares rising the returns brought in by McDonald’s Corporation (NYSE:MCD) in the past have been magnified and are still growing because of the company’s fast rising dividend payout. Go ahead and take a look at the 4-year chart on McDonald’s Corporation (NYSE:MCD) because this is what your investment will probably do, and it is what shares have been doing since they came into existence.
On my graph I see an investment in 2009 could have been made for roughly $60 per share when a $0.50 dividend was being paid (up 24% from the $0.38 dividend paid the year before). Had you bought at that time, your shares would be up approximately 60%, you would have made an additional 18.7% in accumulated dividends and the current dividend would be yielding close to 5% on your original investment … per year, each year and growing.
2. Margins and share repurchases: McDonald’s is no AT&T Inc. (NYSE:T), which continually takes the top spot for companies with the largest buybacks, but McDonald’s Corporation (NYSE:MCD) does buy back a significant amount of shares each year. In the past four years alone, McDonald’s has bought back over $10 billion of its own shares, which does two very important things for investors. The first being increasing the ownership proportion of each share, which means they are worth more, and the second is that it allows the company to raise the dividend without having to pay out more cash each quarter. Fewer shares + same payment = more paid per share.
I specifically used AT&T Inc. (NYSE:T) earlier to now throw out a third point (more than the two I promised)–in addition to all the points above, your McDonald’s Corporation (NYSE:MCD) shares’ returns are extremely safe because unlike AT&T Inc. (NYSE:T), McDonald’s has avoided the margin compression that the telecom and a lot of other companies have been fighting. Will it come? Probably. Does it have an answer for it? Yes (raise prices). And at the current level (around 20%) I would argue that there is quite some cushion for short-mid term pressure.
AT&T on the other hand has been having trouble on this front with costs eating into its margins that have historically averaged over 15%, now around 7%-10%.
And, on more common ground, McDonald’s still registers higher margins than fellow fast food competitor Chipotle Mexican Grill, Inc. (NYSE:CMG), who sits right under the industrial average of 18.6% at 16.5%. Chipotle shares are up 36.8% year-to-date, but at this level look very expensive compared to McDonald’s by virtually every valuation metric, even though, operationally, McDonald’s has the upper hand.
Going forward, margins of all the companies mentioned are sure to face competitive pricing and cost pressures with each one having to decide how much of the costs it can pass on to consumers before they turn away from its product. In that regard, both McDonald’s and Chipotle share an advantage in that their product is more differentiated than AT&T’s. If you want a Big Mac for instance, you go to McDonald’s. If you want a data plan, you have options and the cheapest provider is always going to get a chance to seal the deal regardless of whether or not AT&T has a larger 4G network.
The margins at Chipotle Mexican Grill, Inc. (NYSE:CMG) have fallen a lot faster than McDonald’s, and I think that goes to show how hard it is to offer higher quality foods at a set price. And as Chipotle Mexican Grill, Inc. (NYSE:CMG) becomes forced to raise prices, that only makes it easier for McDonald’s to do the same, which helps margins but more importantly makes McDonald’s and other low-cost fast food chains more attractive to families and anyone wanting a fast and cheap meal.
Foolish bottom line
I’m still wrestling with the idea of purchasing shares because I feel guilty and don’t really look forward to admitting defeat by purchasing shares that I should have bought 5-10-20 years ago. Either way, you and I may get caught looking for the next Chipotle, but right now, McDonald’s shares have pulled back and they probably won’t stay down for too long.
The article 2 Reasons to Kick Yourself For Not Buying McDonald’s originally appeared on Fool.com and is written by joshua kubiak.
joshua kubiak has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill (NYSE:CMG) and McDonald’s. The Motley Fool owns shares of Chipotle Mexican Grill and McDonald’s. joshua is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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