The Difficulties of Holding McDonald’s Stock
The McDonald’s investment has worked out well so far from a total return perspective.
Despite McDoanld’s low volatility, it has not been an easy ride. Investors in April 2014 have had to hold McDonald’s stock through:
– Tainted meat scandal in China
– An actual human tooth found in food in Japan (you can’t make this up!)
– Competition from faster growing investing darlings like Shake Shack Inc (NYSE:SHAK)
Note: SHAK is down nearly 25% since going public in February 2015 due to its absurdly high valuation multiples.
Take a look at McDonald’s performance chart below from April 2014 to now:
Source: Google Finance
It’s not a smooth steady growth trend. It’s around 18 months of no growth (and some declines) in the stock price.
Short-term investors would’ve bailed on McDonald’s and generated losses.
To hold McDonald’s through its difficult times, investors had to believe in the company’s strong competitive advantage – and watch dividends.
McDonald’s has continued increasing its dividends every year. The company is back on its growth track again – and the stock price has followed.
“The single greatest edge an investor can have is a long term orientation”
– Seth Klarman
Only invest in great businesses you will feel comfortable holding if they get into temporary trouble. If you are investing in a stock just because you want it to go up, you will not be able to hold when it falls in price.
Long-term investors invest in businesses. They don’t bet on stock prices.
Follow Seth Klarman's Baupost Group
Today’s Investment Which Most Reminds Me of McDonald’s
Reading this article, you may be thinking:
“That’s nice, but where can I find similar investments today?”
McDonald’s today is not as good an investment as McDonald’s in April of 2014 (or April of 2015).
That’s because the company’s price-to-earnings ratio is up considerably. The company’s stock is currently trading for a price-to-earnings ratio of around 24 (using adjusted earnings). This is simply not a good time to buy McDonald’s stock (it remains a long-term hold, however).
There are many undervalued high quality dividend growth stocks available today…
The investment that reminds me the most of McDonald’s in April 2014, today, is Wal-Mart Stores, Inc. (NYSE:WMT).
Like McDonald’s, Wal-Mart tends to see earnings grow during bear markets.
Like McDonald’s, Wal-Mart is its industry leader by a wide margin.
Like McDonald’s (of 2014), Wal-Mart has a price-to-earnings ratio in its teens.
(Wal-Mart’s price-to-earnings ratio is currently at 15.1 using adjusted earnings-per-share)
Like McDonald’s, Wal-Mart has a low stock price standard deviation:
– 5% for Wal-Mart
– 4% for McDonald’s
Like McDonald’s, Wal-Mart investors are expecting somewhat modest total returns that should at least match the market.
Wal-Mart currently has a payout ratio of 43%, versus 58% for McDonald’s in April of 2014.
Wal-Mart stock currently has a dividend yield of 2.9%, versus 3.7% for McDonald’s in April of 2014.
Follow Walmart Inc. (NYSE:WMT)
Follow Walmart Inc. (NYSE:WMT)
