Sunday, 21 October 2012

A look at McDonalds


I calculate how much I should pay for a stock by dividing the current annual cash dividend by the 3 year and 5 year average dividend yields.

Furthermore, my “super cheap” price is obtained by dividing the current annual cash dividend by a stocks highest yield over the last 10 years.

McDonalds stock price dropped 4.46% on Friday, giving rise to a lot of chatter over the weekend. The table below shows how I determine if the current price of $88.72 is overvalued, fair or undervalued.

MCD-N
Year
High Price
Low Price
1Q
div.
2Q
div.
3Q
div.
4Q
div.
Annual Dividend
High Yield
Low Yield
2000
$43.63
$26.38




$0.215
0.82%
0.49%
2001
$35.06
$24.75




$0.225
0.91%
0.64%
2002
$30.72
$15.17




$0.235
1.55%
0.76%
2003
$27.01
$12.12




$0.40
3.30%
1.48%
2004
$32.96
$24.54




$0.55
2.24%
1.67%
2005
$35.69
$27.36




$0.67
2.45%
1.88%
2006
$44.68
$31.73




$1.00
3.15%
2.24%
2007
$63.69
$42.31




$1.50
3.55%
2.36%
2008
$67.00
$45.79
$0.375
$0.375
$0.375
$0.50
$1.63
3.55%
2.43%
2009
$64.75
$50.44
$0.50
$0.50
$0.50
$0.55
$2.05
4.06%
3.17%
2010
$80.94
$61.06
$0.55
$0.55
$0.55
$0.61
$2.26
3.70%
2.79%
2011
$101.00
$72.14
$0.61
$0.61
$0.61
$0.70
$2.53
3.51%
2.50%
2012


$0.70
$0.70
$0.70
$0.77
$2.87


2013


$0.77
$0.77
$0.77
$0.77
$3.08


Stock prices and dividends are per calendar year.

11y ave
2.73%
1.87%
Dividends are listed in the quarter they were paid.

5y ave
3.67%
2.65%







3y ave
3.76%
2.82%







5y
$83.85
$95.52







3y
$81.97
$89.68







Super Cheap
$75.78


The 3 year average dividend yield of 3.76%* is obtained by averaging the high yields of 2009, 2010 and 2011. To get such a yield today, one would have to purchase MCD at $81.97 (= $3.08 / 3.76%).

Another way of looking at it: The current yield offered by MCD is 3.47% (= $3.08 / $88.76). The table shows that the high yield of 2007, 2008, 2009, 2010 and 2011 were all higher than the current yield. This tells me that MCD is not cheap enough to buy just yet.

McDonalds will likely not reach my super cheap price of $75.78 = $3.08 / 4.06%, but I like calculating it anyway. And if it does, back up the truck honey.

I encourage you to analyze the significant difference between the high and low stock prices for any given year. The difference is astonishing.


*My method is not perfect as the stocks low price may have occurred before the annual dividend increase. 



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