McDonald’s Corp. $51 - New York symbol MCD

MCDONALD’S CORP. $51 (New York symbol MCD; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 1.2 billion; Market cap; $61.2 billion; WSSF Rating: Above average) operates over 31,000 fast-food restaurants in 120 countries. Overseas operations account for two-thirds of its sales, and 40% of profits. The company owns about 25% of its restaurants, but aims to convert them into franchises over the next few years. Consequently, it recently sold 1,600 of its outlets in Latin America and the Caribbean. It received $700 million in cash, but recorded a non-cash $1.6 billion loss on the sale. We think the sale makes sense. Local owners have a better knowledge of local tastes, and can adjust their menus to maximize sales. They will also assume responsibility for capital spending. If you disregard the loss on the sale, McDonald’s earned $0.71 a share (total $869.9 million) from ongoing operations in the second quarter of 2007. That’s a 26.8% gain over the $0.56 a share ($698.3 million) it earned a year earlier. Sales grew 11.1%, to $6.0 billion from $5.4 billion, thanks to extended hours and successful new breakfast items. Same-store sales rose 7.4%. The cash from the sale will help McDonald’s fund its plan to spend $5.7 billion on share buybacks and dividends in 2007 and 2008. It repurchased $664 million worth of its stock in the second quarter of 2007. Instead of quarterly payments, the company usually pays its dividend once a year in December. It will probably increase last year’s payment of $1.00 a share by 20%, to $1.20. That implies a 2.4% yield using the current stock price. Despite the higher buybacks and dividends, McDonald’s should have plenty of cash left for store upgrades and other growth projects. It could also raise cash by selling its remaining casual restaurant chains: Boston Markets in the U.S., and Pret a Manger in the UK. The stock has quadrupled in the past four years, but still trades at a reasonable 19.3 times its forecast 2007 earnings of $2.64 a share. McDonald’s is a buy.