McDonald's

McDonald's Sales are up for the year, as is the stock price.  What is going on with McDonald's?

The big news at the end of the year is that McDonald's stock price is up 35% for the year.  Sales are up for the year - by 5% just in October, and another 7% in November  Even with the hyped stock price, the 70-cent-a-quarter dividend means the company is paying out at about 2.79%.  All this and they have even been raising prices during the year as well.

What is going on at McDonald's?  To be sure, the chain has always been a money-maker.  There is always a line at the McDonald's in Brunswick, and in Politically-Correct Ithaca.  And other chains are struggling.  Whataburger recently closed two stores locally, and arguably their food was better.

 

The stock price has gone up, up, up, which generally means it is a bad time to buy.

So how does McDonald's succeed where others fail?  What are they doing that is different or better than the competition?  It is hard to say, as the food is not particularly special or unique.  All fast-food burgers are pretty much interchangeable.  McDonald's has perhaps used the "dollar menu" to its advantage, to at least draw customers in (and then sell them an "upgrade" to a super-sized value meal).

A recent promotion is interesting - they offer "any sized drink" for a dollar.  Just guessing here, but they probably are not selling a lot of "small" drinks these days.  Soda is cheap, particularly when served from a fountain.  So even at a dollar-a-cup, they are making money on pop, no matter what the size is.  And the soda sale can lead to a more profitable McRib sale.

The question is, is this a good stock buy?  I contemplated buying the stock in January, and only wished now that I did.  As you can see from the price chart above, McDonald's did well, even in the recession of 2009.  And arguably they tend to do better in a sluggish economy, when people perceive it as a bargain in food (while it really isn't, but that's another story).  They are doing well overseas, which is part of the picture.  According to one link, breakfast sales and seasonal peppermint coffee drinks are adding to the bottom line.

McDonald's seems to pay a regular dividend - 61 cents a share earlier this year, and 70 cents a share this quarter.  But it was not always thus!  As you can see from the chart above (and the data below) the company really only started paying regular dividends in 1999.

Dividend History
Date Div*
11/29/11 0.700
08/30/11 0.610
05/27/11 0.610
02/25/11 0.610
11/29/10 0.610
08/30/10 0.550
05/27/10 0.550
02/25/10 0.550
11/27/09 0.550
08/28/09 0.500
06/04/09 0.500
02/26/09 0.500
11/26/08 0.500
08/28/08 0.375
06/05/08 0.375
02/28/08 0.375
11/13/07 1.500
11/13/06 1.000
11/10/05 0.670
11/10/04 0.550
11/12/03 0.400
11/13/02 0.235
11/13/01 0.225
11/13/00 0.215
11/29/99 0.049
08/30/99 0.049
05/27/99 0.049
03/11/99 0.049
11/25/98 0.045
08/27/98 0.045
05/28/98 0.045
02/25/98 0.041
11/26/97 0.041
08/27/97 0.041
05/29/97 0.041
02/26/97 0.037
11/27/96 0.037
08/28/96 0.037
05/31/96 0.037
02/27/96 0.034
11/28/95 0.034
08/29/95 0.034

Prior to that time, Mickey-D's was not a big dividend stock.   You could argue that this means the company has matured and no longer needs to plow money back into expansion - and that might be a good argument.  It also might mean that the company has nowhere to go, other than to watch margins, keep promoting the products, and trying to eke out a living on the margins on burger sales.

The company has a fairly healthy P/E ratio of 19.66 - so wouldn't this be a good buy?  Like I said, it was a good buy in February of this year.  Buying at the peak might be less a good deal.  And I suspect, that due to all the hoopla in the financial channels today about it being the "biggest winner of 2011" that a lot of people will go out Tuesday morning and do something really, really stupid:  buy the stock when it is high.

Part of the problem with the stock is Burger King.  Where is Burger King, you ask?  Good question.  The competition in the burger world is fractured and the No. 2 and No. 3 competitors (actually No. 5 & 7 in the fast food market, see below) are far behind McDonald's.  Both Wendy's and Burger King seem to have lost their way, and both have announced major menu changes to overhaul their foods, particularly their fries.   Wendy's fries were a disappointing bland, unsalted and undercooked potato - hardly anything the folks at McDonald's worried about.

Burger King, in particular, tried to narrow its market focus to the 18-34 year old male market, which was a strategy that seemed to backfire.  The giant fiberglass "King" head promos might have worked with this slacker demographic, but was not about to attract the egg-sandwich-and-coffee-on-the-way-to-work crowd.

The competition, in an effort to distinguish itself from McDonald's, has faltered.  People are looking not for something different, but perhaps more of the same, perhaps at a lower price.  Have it your way is perhaps less appealing than marketers thought.  And Wendy's has always relied on an oddball menu that included chili and something called a "frostie" as well as square hamburgers.

The other chains might be seeing the writing on the wall now, though.  And if they can replicate McDonald's success simply by copying it (instead of trying to improve upon it), McDonald's could see sales slide a bit.  And it is not a hard model to copy - there are few barriers to entry in the burger field - no high technology, no huge investments, and no Patents to worry about.

The other problem I see for McDonald's is the recession - or the recovery, to be more precise.  The economy is improving, slowly, and 2012 will see further recovery, I believe.  Unemployment is edging down to the 8% mark (which is not far off where it should be normally) and consumer spending is up.  As people feel more secure about themselves and the economy, they will want to spend more, and when that happens, a McRib sandwich isn't going to cut it.

Between these two factors, I see the same-stores sales flattening out.  People can only eat so much of the same thing before they get sick of it.  And sometime soon, folks will begin to realize this food is horribly bad for you (but then again, well, people are fools).

The odd thing is, if you look at the price of the stock and the dividends in the long term, the last big peak was in 1999, and it bottomed out again in 2002.  If you were looking at the stock chart in 1999, it would look identical to the one today, albeit on a smaller scale.  And if you bought then, based on earnings in 1999, you'd be crying in 2002 when the stock dropped to 1/3 of its 1999 price.

McDonald's is not a bad stock to buy - you can make a lot of money off of other people's vices, after all.  But I think the stock price is a bit high right now for my tastes.  I think they could see a serious fall-off in profits next year if the economy recovers and their competitors get their act together.  Right now they are doing well, as they have the playing field to themselves.  In business, that is a scenario that rarely lasts very long.  Nature abhors a vacuum, and the people at Wendy's and Burger King are looking at McDonald's market share the way wolves view a meadow full of lambs.

If (and when) sales drop off at McDonald's, so will the profits, and so will dividends.  And that will drive down the stock price as well.  So it might not be a bad "long-term" buy in 2012, when the stock price levels or drops.  But I am not sure that at $100 a share, it is any big bargain right now.  If you bought it at $60 a share, I'd hang onto it - you are making 4.6% just in dividends.

Oddly enough, McDonald's biggest competitor isn't a burger joint, but Subway which is a franchise operation, whose parent company, Doctor's Associates, Inc. (DAI) is a privately held company.  As a franchise from a privately held company, financials on Subway are harder to come by.   And of course, many of their franchises are of the "gas station" variety - small operations that are tucked into fuel stops, Wal-Marts, and the like.


What are the 10 biggest fast food chains in the United States?

1. Subway - 23,336 U.S. Locations
2. McDonald's - 14,000 U.S. Locations
3. Starbucks - 11,000 U.S. Locations
4. Pizza Hut - 7,566 U.S. Locations
5. Burger King - 7,233 U.S. Locations
6. Dunkin' Donuts - 6,500 U.S. Locations
7. Wendy's - 5,877 U.S. Locations
8. Taco Bell - 5,604 U.S. Locations
9. Kentucky Fried Chicken (KFC) - 5,162 U.S. Locations
10. Domino's Pizza - 4,927 U.S. Locations