This series is called "Investments To Grow Old With" or ITGOW. Sure, my former English teachers would want me to call it "Investments With Which To Grow Old," but IWWTGO just didn't have the same ring to it.
I am 24 years old and I have time on my side. But naturally I still want to pick investments that will do well in the short, medium and long term. In this series I will write about companies, sectors and investment themes that I intend to grow old with.
Saturday, June 9, 2012
IGTOW: Why I Added McDonald's To My DRiP
This article focuses on McDonald's (MCD) and is the 2nd in my series, ITGOW: Investments To Grow Old With. I believe that McDonald's fits at least 2 of the investment themes that I outlined in my article introducing the series and has recently entered a range in which I am happy to start buying shares. I used the dip Friday to initiate a position in McDonald's using my Sharebuilder Dividend Reinvestment Plan (DRiP) account. Recently another SA author wrote a terrific article entitled McDonald's:Using European Weakness to Your Advantage. McDonald's had already been on my radar screen for the ITGOW series and his article, along with several other key pieces of information that I link to below, helped me decide that MCD is a good value at these levels.
The Stock's Recent Performance
After Friday's 2.94% decline and Monday's 0.45% decline, McDonald's is now down 13.96% for the year, but when you factor in the two $0.70/share dividends that the company has paid in that time, the decline has been around 12.5%.
Let's break the stock's 2012 performance into two time periods. From January 1st to the day the Dow put in its 52-week high (May 2nd) McDonald's fell 2.81% while the Dow rose 7.34%. Thus, the Dow gained 10.15% relative to McDonald's during this period. But since May 3rd, McDonald's has fallen 11.48% while the Dow has fallen 8.8%. This means that the Dow's outperformance was only 2.68% during this most recent period and that most of the 2012 underperformance in shares of McDonald's took place during the first period. This is the period during which the broader markets were rallying and seemed to be ignoring Europe, which means McDonald's missed out this rally. Why might this be?
I have seen many articles that point to McDonald's exposure to Europe as the cause of this weakness. One article, entitled Europe Will Punish These 4 Stocks, points out that roughly 40% of McDonald's revenues come from Europe. A fair point. And with all of the weakness in Europe it is easy to see why the market would punish shares of McDonald's for this...right?
I have a tough time understanding how serious economic hardship in Europe will translate into problems for the company in the long term. People still have to eat... Maybe some consumers won't be able to afford McDonald's anymore or won't be able to afford as much food at McDonald's as they were buying before...but I would argue that prolonged economic weakness in Europe, which seems likely, will shift more consumers into the demographics that rely on McDonald's for cheap food.
I attribute the weakness in the first period of 2012 to both a minor correction in the PE multiple (it had approached 20 when shares traded over $100 and is now just above 16) and an overreaction by the market to what effect European weakness will actually have on the company. And what of this most recent period since the Dow put in its 52-week high on May 2nd? I believe that the decline in shares of McDonald's is almost entirely explained by broader market weakness. If Europe were really the issue with McDonald's then the recent Euro-related fear should have had a much more profound impact on shares of McDonald's than a mere 2.68% underperformance relative to the Dow.
How does McDonald's fit into my ITGOW themes?
McDonald's fits into ITGOW theme #8, Prolonged Income Disparity in the United States, because I also believe the same prolonged income disparity issues will exist in Europe and this broader trend will push more people towards restaurants like McDonald's. It fits #11, Cheap Food, because let's face it - despite all of the reasons not to, many people will invariably choose for the cheapest food they can get. Where else can you drive up and get 3 burgers and a soda for under $5 dollars (including tax)?! McDonald's is also making significant strides towards theme #10, Healthy Food, which will help it skillfully dodge criticism and also reclaim business it may have lost to places like Panera (PNRA). This push towards healthier food and beverage options will also be key to McDonald's battles against those who argue its food and sugary drinks need to be banned or taxed, as evidenced by New York City Mayor Michael Bloomberg's recently proposed ban of sugary drinks over 16oz.