Investment Review - McDonald's Corporation $MCD

I've been investing in individual companies for over a decade now.  Honestly, it still seems like just a few years ago that I nervously made my first purchase of an individual stock.

I've made plenty of good decisions and my fair share of poor ones, but anyone that bats 1.000 with investing is lying to you.

In case you don't know the investment style that I follow is as a long-term dividend growth investor.  As such I believe that it's good occasionally review your investments as well as their results.

While I've typically done these reviews internally, I felt that it was probably best to share my thoughts on my investments as a way of thinking out loud.  Over time I plan to recap my investments that have at least 5+ years since the date of my first investment in order to see what's gone right or wrong.

Overview

McDonald's is well-known in the dividend growth investing crowd and for good reason.  They've increased dividends every year since 1976 which is an incredible accomplishment and puts them in very rare company.  That streak is now up to 47 years old and should reach Dividend King status in just a few years time.

McDonald's operates and franchises out the McDonald's brand and concept and is one of the largest restaurants in the world by location count.  McDonald's is a mix between a consumer staple and consumer discretionary company.

I first purchased shares of McDonald's in November 2011 and that means that November 2023 will mark 12 years of ownership since that first purchase.

How Did We Get Here?

One of things I've started doing when looking at potential investments is to break down the returns into its various components.   By doing this it lets me see what the source of returns have been over time between business justified, capital allocation, and sentiment.

Obviously the best source of returns are from an improving business through growing sales and profits with sentiment change being the least sustainable.  Banking on a multiple continuing to re-rate to higher and higher levels just isn't likely.

Between FY 2011 and FY 2022 McDonald's business justified returns, as measured by sales growth and net profit margin change, came to just +1.1%.  

The capital allocation returns came from a 2.5% starting dividend yield and a 3.0% annualized decline in outstanding shares which is good for a total annualized return of +5.5%.

The sentiment change returns worked out to a +5.1% annualized increase due to the multiple expansion over that time.

Of the ~11.7% CAGR over that time the business returns accounted for only 10% of the return contribution, with capital allocation providing ~47% and the remaining ~44% being from sentiment change.

That isn't all that exciting as the underlying business hasn't performed well; however, it's important to put some context around that.  McDonald's has continued to franchise out more of their company owned stores which has led to the decline in sales over that period, but has contributed to the rise in margins.

Dividend History

McDonald's dividend growth history has been incredibly strong is now up to 47 consecutive years of dividend growth.  At the time of my initial purchase of shares the quarterly dividend payment was $0.70 per share per quarter and in October 2022 the dividend was raised up to $1.52 per share per quarter.  That's a solid 117.1% increase from a very stable, predictable, and consistent business.

While it looks like there was a dividend cut around 2008 that was really just a swap from annual to quarterly payments.  

Investment History

As I mentioned earlier I first purchased shared of McDonald's in November 2011.  I've since added more shares with 4 other purchases.  In total I had purchased 102 shares with a total cost basis of $8,957.41.

I've also reinvested 8 dividend payments over time increasing my share count by 3.287 with a total reinvested dividend cost basis of $350.73.

Additionally I have sold 45 total shares, through two sale transactions, that netted a total profit of $3,033.49 compared to the $4,031.32 in cost basis for those sold shares.

Last but not least I've received 37 dividend payments in cash for a total payout of $3,051.46.

Dividend Payback

In total I've received $3,051.46 in cash dividend payments with an additional $350.73 being reinvested which brings the total dividends received to $3,402.19.  Those $350.73 in reinvested dividends are now worth $861.29.

The $3,402.19 in dividends represent a 57.8% payback ratio compared to the capital I've invested in McDonald's, although it's not entirely accurate due to the sales.  

Adjusted Basis & Returns

My first purchase of McDonald's was for $92.82 per share all the way back in November 2011.  Accounting for all of the shares that were purchased, as well as reinvested dividends, and the cash dividend payments, my adjusted per share basis is down to $36.91.  Including the realized gains from the sold shares, ex-taxes, the adjusted basis for my remaining shares comes to -$13.40.  

The following chart shows my investment history with McDonald's over the years.  One of the reasons that I was drawn to dividend growth investing is that pink area below.  Dividends are always a positive source of returns and much more reliable than capital gains.  

From a total return standpoint McDonald's has performed quite well.  As long as McDonald's continues to execute and deliver results and of course dividend increases then they will remain in my portfolio.

*Returns are calculated through 3/12/23

A year after I had first purchased shares of McDonald's, I was actually sitting on an unrealized loss.  Even as late as 2014 the returns hadn't really been that remarkable with a total return just over 9%.  

However, since then the dividends have continued to pile up and McDonald's has been moving in the right direction for their business.  Outside of the COVID related selloff my total return hasn't suffered any major drawdowns with McDonald's.  

Such is the life of an investment in a boring, well-established and well-run business.

Based on the timing and sizes of my investment cash flows, McDonald's has generated a 14.1% IRR.  

You can view interactive McDonald's dividend history, dividend growth rates, and dividend yield theory charts here.

Using dividend yield theory for a quick estimate on valuation, McDonald's appears to be right around fair value.

McDonald's currently offers a forward dividend yield of 2.32%.  The 3-year average forward dividend yield is 2.33% with a fair value range (+/-10%) of $237 to $290.  Meanwhile the 5-year average forward dividend yield is 2.38% and the fair value range is $232 to $284.  

Lessons Learned

McDonald's has been a fantastic investment for me.  I think you'd be hard pressed to find too many people that would complain about a 14% IRR over 11 years, especially from a company that hasn't undergone any significant drawdowns either.  That definitely makes it easier to hold on for the long term.

My only real regret is that I had stupidly sold down my position.  The initial sale was due to me being too caught in the fact that businesses take time to right themselves and even more so for the stock market to finally catch on.  

Additionally, I was way overweight McDonald's in the early part of my investment journey.  If I knew what I knew now I wouldn't have been as concerned about my overweight position as there was still plenty of time and capital to come to help re-weigh the position over time.  

Do you own shares of McDonald's?  Do you typically DRIP all dividends or take them all in cash or selectively turn the DRIP on?