Video summary
The video begins by addressing recent investor sentiment regarding McDonald's stock, noting that a surge in comments often signals a decline in share price which subsequently makes the P/E ratio and dividend yield appear more attractive. The speaker revisits an intrinsic value calculation previously discussed to evaluate the current return potential, highlighting that the company currently offers a dividend payout ratio of 100%. By adjusting for different growth assumptions and terminal values, the analysis reveals that under conservative scenarios with a five percent dividend growth rate and a four percent yield, the intrinsic value falls below two hundred dollars. Conversely, if investors are more optimistic about a lower yield, the stock might be considered fairly valued, but under negative outlooks requiring a five percent yield to compensate for risk, the present value drops significantly to around one hundred fifteen or sixteen dollars, indicating that current price levels offer little margin of safety.
A critical factor driving this valuation is the prevailing interest rate environment, specifically the ten-year Treasury yield which has risen to 4.77 percent. The speaker explains that when interest rates were low at two percent, a two percent dividend yield from McDonald's was acceptable, but in the current high-rate climate, investors demand a much higher yield for such a stock, making it unattractive at its present price of three hundred dollars. The business fundamentals are described as solid but slow-growing, with earnings increasing by roughly six percent due to buybacks and franchise growth remaining steady rather than spectacular. Consequently, the stock has struggled to perform well over time because it fails to meet the higher yield expectations necessitated by the lack of interest rate cuts that many had anticipated earlier in the year.
The analysis concludes that McDonald's is essentially an interest rate play where its future performance is heavily dependent on whether rates decline; if they do, the stock could see significant gains beyond dividends, but if rates remain high, the share price will likely continue to face downward pressure even if business operations improve. The speaker references Peter Lynch's investment philosophy regarding slow growers, suggesting that such companies should only be avoided unless priced at extremely bargain levels, a condition McDonald's currently does not meet. Therefore, the recommendation is to treat the stock with caution as an expensive holding until either interest rates fall or the share price drops sufficiently to align with the required higher dividend yields, potentially moving it into a buy category only if market conditions shift favorably.
Read the full video transcript
Good day, fellow investors. A lot of
comments about McDonald's. When there
are a lot of comments, that also means
that the stock is down. The P/E ratio
starts to get attractive, the dividend
gets higher. Let's look into this. I
discussed McDonald's already a few
times, likely once per year.
So, we have to see where we are now on
the return side of things. And for that,
the best way is to go to our intrinsic
value calculation. For comparative
reasons, McDonald's has been analyzed
already. Here it is. I will add it here
to the newer discussions when we have
also the link for the video. So, you can
follow also there, but let's go to
McDonald's. I have used different
dividend per share. Now, that dividend
is 7.44.
I have to adjust that. I have to adjust
the years, their terminal value, where
we are, where we are going. And now, if
we look at McDonald's dividend stock,
dividend payout ratio, 100%. If the
dividend grows at 5%, if you take a 25
terminal multiple, which is a 4%
dividend yield, the intrinsic value is
below 200. If we are more exuberant, 5%,
but we are happy with a two, or let's
say 2.something percent dividend yield,
then McDonald's is fairly valued.
However, if I am more negative, if I say
I want a 5% dividend yield, then the
present value is far from the current
stock price. This would be a value
investing scenario. So, from that
perspective, I could be even a little
bit more aggressive, put 15 here, and
then present value for a value
investment there would be around 115,
16. So, at current levels, we are far
from margins of safety, far from
anything. The stock price was much
higher at the beginning of the year, but
keep in mind that at the beginning of
the year everyone was expecting interest
rates to go lower. And this is the key
when it comes to McDonald's. Interest
rates didn't go lower.
10-year Treasury is at 4.77.
When you compare the 2% McDonald's
yield, now McDonald's isn't attractive
at the stock price of 300. They need a
higher yield. Stock price needs to come
down. This time, when interest rates
were at 2%, then a 2% dividend yield
from McDonald's was okay. Now, perhaps
one needs 5% dividend yields from
McDonald's. And that's also the reason
why practically the stock hasn't done
much over time. If we look a little bit
at the business, yes, it is growing 5%.
A little bit of buybacks. Earnings grow
at 6% thanks to those buybacks. So,
nothing stellar. Maybe they will find
new ways, but it's unlikely they will
grow more than single-digit numbers
during the capital markets day. And you
can see here, franchise is okay, but
slow growth over time. Nothing
spectacular. If we go to 2019, compare
it to now, okay, a few percentage points
growth, that is what McDonald's
delivers. A little bit better on the
earnings per share side because of the
buybacks, then they slowed down, then
now they're more focused on dividends.
So, this is an interest rate play.
Dividend yield is still relatively low.
Of course, if interest rates go down,
you make your 20-30% on top of the
dividend. If interest rates stay,
McDonald's will go lower even if the
business is doing well. From that part
of the valuation, we can add it to our
quadrant just for fun a little bit. And
then if the stock price goes lower
because of the defensiveness, we can
then bring it, depends on the stock
price, more towards the buy quadrant.
Peter Lynch in his book used to say,
"Avoid these slow growers if they are
not priced at extremely bargain prices."
McDonald's is not priced at the bargain.
McDonald's is expensive
a void. Thanks for watching. Check what
I do on my research platform and I'll
see you in the next video.