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Friday, 07/18/2003

Would You Like Fries with That?
By Nich Sheldon
MCD - McDonald's

Company Description

McDonald's is the leading global foodservice retailer with more than 30,000 restaurants serving nearly 46 million people in 100 countries each day. Approximately 80 percent of McDonald's restaurants worldwide are owned and operated by independent, local businessmen and women.

[Source: Company Press Release]

Reasons to Invest:

When searching for a good DRIP to write up we can surly work up an appetite. What better is there to eat in this fast paced market than fast food? This week we are highlighting the world's largest fast food chain, McDonald's (NYSE: MCD). From the looks of McDonald's chart, their stock has been trading sideways since their gap higher on June 6th, 2003. Well, over a month of sideways trading had shareholders of MCD contemplating whether or not they should hold the stock or sell it. On Tuesday (July 15th, 2003) investors dumped the stock and MCD opened lower. At ts current level this stock looks attractive and the dip that occurred this Tuesday provides a nice entry point for DRIP investors. The stock has been going strong since the recent sell-off bouncing off of the 50-DMA today gaining 4.4%, or 90 cents on the session.

One reason for the one-eighty MCD provided today was an upgrade by Bear Stearns from "peer perform" to "outperform." The stock currently has 16 brokers covering them, and only one of those brokers are recommending to "sell" while the rest of the brokers are recommending anything from "hold" to "strong buy." You can see the current ratings of these brokers below this write-up in the "Brokers Recommendations" section.

McDonald's is trying to improve the nutritional value of their food by offering healthier food items. They are testing a new product for happy meals, which basically gives parents the opportunity to choose fruit instead of fries for their children. The featured fruit is apple slices, which can be dipped into caramel. MCD is calling this item "Apple Dippers" and they will cost an additional $0.20. They are planning to test this item later this summer. The McDonald's food chains in the United Kingdom already serve fresh fruit in their happy meals, while the Sweden chains offer baby carrots and juice as additional menu items.

The Golden Arches own, Ken Barun, VP of the company's Healthy Lifestyles Program, stated that, "We've been listening to what our customers want for a long time... Now they are telling us they want more menu choice and more of a balanced lifestyle. McDonald's wants to offer quality new choices so customers can have balance in their diets." New "Salad Shakers and Fruit Parfait" have boosted sales for this fast food giant, and boosted sales equals better earnings which lead to higher profit margins and higher price action.

More good news came about for McDonald's when top Senate Republican, Mitch McConnell, reported that he would try to head off potential lawsuits against purveyors of high-fat foods. His plan is to draw up a bill that protects the food industry from suits alleging they cause obesity, retorting, "You should not be able to sue someone else because of your own eating habits." The National Association of Food Processors president John Cady agreed with Senator McConnell's notions saying that McConnell's bill is a "timely, strategic and needed response" to the lawsuit threat that continues to be drawn to fast food chains. This news is critical for the food industry as it provides these restaurants a little cushion from lawsuits based on peoples own eating habits.

Also alleged about McDonald's was the news that their capital spending program has improved their free cash flow. The company is also likely to increase their dividend and start a new healthier national advertising campaign. This speculation is of course a factor in what could see this stock soaring higher.

Bear Stearns analyst Joseph Buckley, sees McDonald's at approximately $26-$27 by year-end. This, of course, is his personal opinion but he remains optimistic on the company noting that he sees a profit of $1.40 whereas the consensus is only a mere $1.33. He also expects $1.50 a share while the consensus is a dime lower at $1.40. Buckley is basing his estimates on improved trends and management tactics.

In an attempt to keep customers happy, MCD is launching a test in 75 restaurants in the Bay Area, which offers high-speed wireless access to its customers. This plan has already been tested in ten of New York's McDonald's eateries and the company is hoping to offer this in hundreds of its restaurants by the end of the year.

In a more statistical sense, MCD has a current annual dividend of $0.23. By the end of the first quarter, McDonald's total revenues rose 6% to $3.8 billion. Their net income before accounting changes increased 4% to $364.2 million. The company is also projecting a three-year growth rate of 5.13, which is close to their five-year growth rate estimate of 6.19. In respects to dividend percentage growth rates, McDonalds is foreseeing a 4.44 growth rate by year-end, 5.52 within three years and 7.83 half a decade from now.

Over the past four weeks, McDonald's is ranked 82nd out of 99 in the food industry - with 99 being the best price performer. This is a major sign of strength for the Golden Arches and is much higher than their 13-week price action ranking of 69th in the industry.

All in all, one can assume that McDonald's is headed higher. With healthier choices on their menu, improved price action, new technologies being offered for their customers and increased revenues, McDonald's continues to prove that they will do what ever it takes to keep their customers satisfied and their portfolios diversified. With all of this said, the only question in our minds is, would like to super-size that DRIP?

Until next Week,
Nich Sheldon

Broker Recommendations

Strong Buy:      3
Buy:             3
Hold:            9
Sell:            1
Strong Sell:     0

DRIP Information:

Shares to Qualify = 10
Auto-reinvestment = Yes
Accept Foreign Accounts: Yes
Temper Enrollment:  Yes

Min/Max Investment = $50 to $250,000/year

Reinvestment Fees - 

Dividend investment fees: $0.75
Cash investment fees: $6 + 10c/share
Auto reinvestment fees: $1.50 + 10c/share


Transfer Agent:

First Chicago Trust
800-621-7825

Corporate Headquarters:

McDonald's Plaza
Oak Brook, IL 60523 
Phone: (630) 623-3000
Fax: (630) 623-5700



 
 

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