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Is McDonald’s (MCD) a buy?

I believe McDonald’s is a buy at this price. The fast food chain was beaten down by slowdown pressure in fast food industry although this giant is able to survive even in tough economic times. I remember I was once reading in 2008 an article how fast food chains were prospering due to cheaper price for food and many families went dining out in these restaurants.

People will eat no matter what and McDonald’s is a leader in this industry. Innovation, coffee menu (which was accepted very well and became a serious competitor to Starbucks) and innovations in menu (such as Angus 1/3 lb Hamburger) will make this giant overcome today’s pressure which is considered by some analysts a cyclical one.

I already owned this stock in the past. I bought it when it was selling at $76 per share and sold it at $98 per share. At today’s prices at $86.8 per share I believe it is time to add it back to my portfolio.

The company increased dividends lately as well.

Per Morningstar:

McDonald’s generates revenue through company-owned restaurants, franchise royalties, and licensing pacts. Restaurants offer a uniform value-priced menu, with some regional variations. As of March 2012, there were 33,500 locations in 119 countries, including 27,100 franchisees/affiliates units and 6,400 company units.

What can I say about MCD that hasn’t already been said? Nothing, really. I recently wrote that the sell-off in MCD shares offers the long-term dividend growth investor a solid value at current prices under $88 per share. The P/E ratio stands at 16.57 and the yield is currently at 3.50%. That’s a pretty strong entry yield for a global juggernaut like Mickey D’s. I currently have 40 shares of MCD in my Freedom Fund, but would gladly pickup more if the weakness continues here.

Using a Dividend Discount Model to value the shares here, I used a 10% dividend growth rate for the next 10 years, followed by a terminal 8% growth rate and used a conservative 12% discount rate. That gives me a fair value of $107.50. Seeing as how MCD actually has a 10-year dividend growth rate of 27.4% along with 36 years of raising the dividend, I think the value is justified. The reasonable balance sheet doesn’t hurt, either.

I will use the same entry model as in my previous purchases to buy a few shares (unfortunately I do not have enough capital yet to buy more, so I have to be accumulating slowly although my commission per trade will be higher in this case). My plan is however continue investing into good quality dividend paying stocks with good dividend history and good dividend growth. I will be reinvesting all dividends and the first task is to reach 100 shares in each selected company so I can apply covered call strategy to boost the income. Lately when I raise capital further I plan also applying selling naked puts. But that will be my next step.

As far as this trade I opened an order to buy MCD if the price raises above 87.15, but not more than 87.20 per share.

Happy Trading!

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