In considering new entries for my retirement portfolio, it was inevitable that I’d have to consider McDonald’s (NYSE:MCD). I say this not only because my cousins own several franchises, but because I had both a Ronald McDonald and Hamburgler doll as a kid.
Isn’t that enough to consider buying the stock?
Seriously, if you aren’t considering McDonald’s at one time or another as an investor, you aren’t taking Mayor McCheese’s contributions to the economy with enough weight. Sure, commodity and energy prices can impact McDonald’s, but the truth is that people will always need cheap eats.
As one cousin told me, “Larry, in good times, our stores do good. In bad times, our stores do great.”
Indeed, McDonald’s same-store sales increased during the financial crisis because of those cheap eats. Yes, there is competition, but McDonald’s has somewhere around 44% of the fast-food industry’s market share. Its stores are everywhere. And because the company soaks its franchises for 6% of gross monthly sales (on top of the buy-in fee) and constantly harangues them to purchase expensive new equipment, there’s plenty of additional revenue on top of sales.
Everyone freaked out a few months ago when global same-store sales fell for the first time in 10 years. I wrote then that it was nothing to be worried about — the company’s new CEO was still transitioning. Since then, the company has been working hard against the perception of its food as being allegedly unhealthy, and is focusing on margins by pushing bigger-ticket items. Plus, its ability to procure raw materials cheaply because of its size will always give it a huge advantage over competitors.
All of this has worked in the company’s favor, and that same-store sales number became nothing more than a blip on the radar.
Stock analysts looking out five years on McDonald’s see annualized earnings growth at 9.3%, which is amazing considering the length of its reach. At a stock price of $99 on FY 2011 earnings of $5.78, the stock presently trades at a P/E of 15.4.
I believe The Grimace is in charge of the company treasury, and he last reported a cash hoard of $3.72 billion, against $13.6 billion in super-cheap (4%) debt. The company actually grew net income during the worst of the financial crisis (5.5% in 2009, 9% in 2010), and has a trailing 12-month free cash flow of $4 billion, on top of the $4.4 billion in FY11, and $4.2 billion in FY10. The company increases its dividend every year, and right now it’s at 3.1% — 75% of FCF is paid out as that dividend.
But is it right for a retirement portfolio?
Considering 9.3% growth plus a 3.1% yield plus a 20% premium (for its fantastic global brand, great cash flow and great execution), a 15 P/E is acceptable to me. Yes, the stock is a bit pricey, but it’s still 10% below its 52-week high.
I think you could do a lot worse than having this stalwart growing steadily in your retirement account.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets @ichabodscranium.