TAKING STOCK: McDonald's

Dear Mr. Berko:

Is McDonald's stock one of Warren Buffett's largest holdings? How many times has McDonald's split? Please tell me when McDonald's will split again. I bought 100 shares in October of last year at $94, and I'm only ahead by 7 points. Should I continue to hold this issue for future growth, or do you think I should wait until it splits and then sell it?

FS, Bloomsburg, Pa.

Dear FS:

McDonald's (MCD-$101) has split 12 times since coming public in 1965. The most recent split was a 2-for-1 distribution in March 1999, when the shares traded at $85 and the dividend was a niggardly 18 cents. Today the dividend is $3.08. The previous split (also 2-for-1) was in June 1994, when MCD was trading at $62 and the dividend was 12 cents. All of the other splits occurred when the shares were trading between $65 and $110.

Mr. Buffett does not own MCD. Wells Fargo is his top position, followed by Coca-Cola and IBM. Buffett purchased 35 million shares of MCD in 1995 at $41 and sold them in 1997 and 1998 for between $49 and $62 a share. This was certainly not one of Buffett's finest moves but quite profitable nonetheless. I recall when MCD came public in 1965 at $22.50. I bought 50 shares at $26 shortly after the offering. Like Buffett, I didn't keep my shares, and like Buffett, I made a small profit on the sale. However, if I had kept those 50 shares, I'd now have 36,000 shares, worth more than $3.6 million. And if I had reinvested every dividend, I'd have about 47,000 shares -- worth $4.8 million, give or take a few hundred thousand dollars. I'd say this is a mighty impressive investment for a company that peddles hamburgers, french fries and milkshakes.

MCD is a dividend darling. Its $3.08 payout, yielding 3.1 percent, has been raised annually for more than 35 consecutive years. Though revenues have grown each year since inception, there have been a couple of years in which earnings have not increased with revenues. Those lean years were the result of new competitors in the marketplace, high advertising costs and aggressive corporate expansion. However, most analysts believe that MCD will continue to grow revenues, earnings and dividends annually over the foreseeable future. New competitors will always compete in the marketplace, but management has faced them well in the past. There will continue to be various rough patches as revenues in Asia and Europe are affected by a tough economic climate. But MCD continues to increase revenues in the U.S., thanks to expansion of its dollar menu, its clever promotions and its excellent new product offerings.

One drawback, though, is that MCD's glacially slow and frustrating counter service is driving business to the competition. The drawback with too many of MCD's people is they don't know how to interact intelligently and efficiently with customers. There are some units where smart, attractive employees proudly wear their uniforms and take pride in their work. This service is evident at most of MCD's 7,000 bright and smoothly run company-owned units, which average $3.6 million in annual revenues. However, the sloppy and indifferent service at many of MCD's 27,000 franchised units is very evident, which is why those locations average about $2.5 million in revenues. On a non-busy afternoon, it can take 10 minutes to complete a six-item order, and the bag of goodies you receive is usually missing a fry or burger. Unfortunately, higher food costs, liability insurance and taxes and a huge jump in health insurance premiums are forcing franchisees to hire from less skilled labor pools.

I suggest you keep the shares. Consumers are learning to embrace lower expectations and poor service because they have little choice. This is the new normal. MCD's revenues, earnings and dividends for 2014 should improve by 8 percent, and the out-years look fairly good, too.

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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.

© 2013 Creators Syndicate Inc.

Published: Fri, Jun 7, 2013

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