Lately with all the saving I’ve been doing to get ready to move into my own apartment off base, I haven’t had a lot of money left over each month to invest with. Therefore I’ve been doing all my stock investing in my commission-free Loyal3 account. The last few months I’ve mostly just been buying shares of Coca-Cola (KO) as the stock has continued to trade at a fair valuation.
Although Loyal3 is great with their no commission or fee set-up, it is limited by the number of stocks you can buy. The whole list can be found here. Browsing through them the other day I separated out all the ones that (A) paid a dividend and (B) has increased that dividend for at least 5 years. This is what I came up with: Coca-Cola, Dr. Pepper Snapple (DPS), Hasbro (HAS), Kellogg (K), Mattel (MAT), McDonald’s (MCD), Microsoft (MSFT), Nike (NKE), Pepisco (PEP), Target (TGT), VF Corp (VFC), and Wal-Mart (WMT). Not a bad list to choose from by any means.
I plan to continue to dollar cost average into KO and add more to my TGT position as long they remain fairly valued and undervalued in the case of TGT also but wanted to add a new position to continue diversifying my portfolio. Of the ones mentioned above, I decided to go with the home of the golden arches: McDonald’s, to add this month.
As I’m sure most of you know, McDonald’s is a global fast food franchise with locations in over 100 countries. It was founded in 1964 and currently has a market cap of $96 Billion. The dividend champion has been increasing their dividend for 38 years now. While the latest dividend increase of 8.7% disappointed some dividend growth investors after seeing double digit increases over the last few years since 2008, the stock still has a 5 year dividend growth rate of 13.9%.
Taking a look at the rest of the company’s fundamentals, McDonald’s has a current P/E ratio of 17.6 which compares favorably with their 5 year average P/E of 17. The forward P/E is fairly low at 14.9 which is below the S&P 500’s average forward P/E of 16. Going back ten years, MCD has been able to grow earnings per share every year except in 2007.
This trend is expected to continue in the future with estimated 8.4% earnings per share growth over the next five years, about the same as the past 5 years. This should allow the company to continue to raise the dividend in line with earnings growth and with a payout ratio of only 58.38%, allows the company to grow the dividend in excess of earnings if they choose to do so.
In conclusion, McDonald’s looks like a good long-term investment opportunity at its current valuation considering its dividend growth history, expected future earnings per share growth, and dividend growth rate. I will be starting to dollar cost average into this stock starting this month.
Full Disclosure: I am long KO, TGT, and will be initiating a position in MCD soon. Please see my disclaimer page.
What do you think of McDonald’s as an investment right now? Does anyone else own it in their dividend growth portfolios? Thank you for reading.