MY #3 FAVORITE STOCK OF ALL TIME (Nobody Guessed This Dividend Paying Stock)

I am so excited about today’s dividend investing article I am going to share with all of you my number three top favorite dividend stock of all time if you’ve been following my channel for a while. You know. that my number one favorite dividend stock of all time is Johnson Johnson and. You know. that my number two favorite dividend stock of all time is PepsiCo and so I’ve got one in the healthcare space one in the consumer non cyclical space and number three I think it’s really going to surprise everyone. Because I’m over seven thousand subscribers on my youtube channel right. Now I am so thankful so blessed for that I share articles here on YouTube about my journey in personal finance and dividend paying stocks and my journey towards living off of passive income off of dividends and. I get a lot of questions here and a lot of feedback and a lot of questions about specific stocks. But it’s very rare it’s very very rare that folks ask about this specific stock and. So I am so curious as to why that is. So I can’t wait to see the comments below on this particular article and I want to see what all of you think about my number three favorite dividend stock of all time and I am talking about McDonald’s let’s get started hey everyone so I’m back this is gonna be a great article today all about my position my thoughts on McDonald’s Corporation my number three favorite dividend stock of all time I love this company it’s a great company there’s a lot to say about this company before I even get into this specific company though I want to illustrate why this is my number 3 favorite stock of all time if you think about my number one favorite stock Johnson Johnson we’re talking about health care we look at my number two stock consumer non cyclical this is PepsiCo number three it’s got to be in a different industry. So this one is a restaurant this is a restaurant based stock and. So I love that I love that my top three they all complement each other they’re all a little unique and a little bit different and they work together as a team and. So I really love that and look if I could only own one dividend stock quite frankly I would be fine owning either my Johnson Johnson PepsiCo or McDonald’s any one of those I would be fine holding any one of those if I could just own one hypothetically. But let’s say hypothetically I could only own three these would be the three and I would feel really solid about that portfolio and. Now my portfolio has 37 stocks in it. But I always need to remind myself hey e and focus on the top lines focus on those top core positions. Because those are the ones that are going to drive the magic over the years in terms of dividend income and. So I first started buying McDonald’s back in 2011 and I had waited honestly way too long I’ve been watching this stock pretty much since I first got started in investing over 20 years ago this is one that had always been on my radar and I think it’s probably on a lot of people’s radars although not on this channel apparently. Because I rarely get comments about it which just surprises me. But when you think about someone growing up in the United States and just kind of growing up as a kid Oh everyone is kind of exposed to McDonald’s and that fast food that food that McDonald’s offers and so from an early age if you like their marketing is amazing that branding just that connection with the brand so just that affinity that I had for the brand since an early age kind of informed my desire to want to invest in this company to want to own a piece of this company. But I just so happened just so happened to get around to it in 2011. So I kind of waited a long time. But better late than never anyways I purchased it for 73-53 per share when I first purchased McDonald’s it’s gone up quite a bit since then right. Now as of May 25th of 2018 we’re looking at a hundred and sixty three dollars per share basically I’m up a hundred and twenty-two percent in terms of capital appreciation on my original purchase price and not bad and I don’t invest for capital appreciation. But it’s surely nice to achieve some capital appreciation when possible and it’s an indication that the company is moving in the right direction that the management team is doing all the right things and anyways when I first purchased the dividend dividend is paid quarterly here I think way back in the day I remember this one it used to be twice per year. But. Now it’s quarterly and it came out to a total of 244 per share when I first bought starting yield of 3.3 percent not great. But not bad it’s kind of in line with what I typically expect with a starting yield the dividend has increased over time quite a bit it’s up to four dollars and four cents per share right. Now if I take the four dollars in four cents I divide by my purchase price of 73-53 my personal yield on cost for my initial purchase of McDonald’s is five point four nine percent not not great. But not bad at all five point four nine percent yield on cost for a world-class brand an iconic brand like McDonald’s I’ll take that all day and it’s only going to go up from here. Because this company has a history of increasing the dividend each and every year and I expect them to do that in the future and so I’m excited about that so real good stuff here just um on my seven years or so there abouts that I have been involved with owning the the McDonald’s company in my personal portfolio and worth noting obviously this is a core position of mine it’s a very important position certainly not as big as my position in Johnson Johnson. But I want to work on this one over time I want to add more to it unfortunately here in 2018 I’m not a buyer of McDonald’s just. Because it’s richly valued right. Now where is Pepsi for example I am buying it here in 2018. Because it finally dipped I finally get a buying opportunity on that one this company just has not dipped in the last few years it’s actually done quite well it’s gone up quite a bit and the current p/e ratio actually is a twenty five point six two that’s a rich p/e and the current I dividend yield it’s only a two point five percent this starting initial dividend yield and so that in my opinion is not a very attractive value for McDonald’s I think these numbers are high. Because the company is really starting to turn the corner and grow quickly again and they’re doing this. Because of some reef franchising I’m going to talk about this in a minute I’m excited about this reef ranch izing and quite frankly. Now that I’ve seen this reef ranch izing work at McDonald’s I have more faith in my position in coca-cola as well it’s another stock I own by the way I’m gonna link in the description below to all my articles about Johnson Johnson Pepsi and coca-cola. So you can check those out as well. But anyways just planting the seed there this reef franchising is really working for them revenue earnings are all starting to turn the corner well revenue is a weird one. But revenue from franchised businesses from franchised stores is growing and. So I think they’re starting to turn the corner on that reef franchising and it’s pushing the share price higher. Because people are looking towards the future. But that being said when I buy back at $73 and it’s a hundred and sixty-three. Now and the PTU is 25 and the starting yield is a 2.5 percent it’s just not for me in 2018. But I’m holding strong I’m reinvesting dividends and I’m waiting for a dip. Because when the dip comes I will be adding to my position I cannot wait to own a bigger piece of the iconic brand that I love so much so what I did next is I went into their their annual report for 2017 and in the annual report for 2017 one of the first things that I noticed is the McDonald’s company is very very proud to show how they performed versus the S&P 500 in versus the Dow Jones Industrial Index. In fact, over the five-year period a cumulative return that I imagine includes both capital appreciation and dividends has outpaced both the S&P 500 and the Dow Jones Industrial Average this is important to note here. Because. I get all these comments like hey with the dividend strategy you’re always going to underperform the market why not just invest in an index fund why would you invest in individual dividend stocks you will not believe how many times. I get that question and it’s a it’s a valid question. Because I think the press out there the media it is so focused on index funds these days that I think investors more or less default to thinking hey index funds they’re they’re the greatest and don’t get me wrong. I think there’s many good things about index funds and I commend anyone who is involved in investing at all and whatever one strategy is I think it’s a great thing to be partaking in investing in one’s future obviously index funds are not the the core of my strategy. But I have a lot of respect for them. But anyways. I get these questions and I just want to point this out. Because hey if one invested in McDonald’s this is an old-world company obviously very well-established is it growing rapidly maybe it will start to do that. Now it’s starting to grow it certainly has some things in its favor. But it’s a steady big strong world-class brand one wouldn’t think hey does that beat the S&P 500 or does it beat the Dow well yes it can and yes it did for the last five years and so that’s a cool thing and worth noting anyways I wanted to get into the numbers here a lot a lot of numbers here on this when I spent a lot of time preparing for this article. Because I’m really passionate about this company it’s one in my portfolio that I I may have the most passion for and I think it just goes back to those early days that even when I was a young child my mom would take me to McDonald’s once in a while as a treat obviously we didn’t eat this kind of food all the time. But when we went it was always a pleasurable experience I enjoyed it they had like the kids play area I enjoy the food and it’s an experience and so all the way from those days to present I look back and I have I just have fond memories of McDonald’s and I think that’s part of the marketing machine quite frankly that that is working in this company’s favor and I love it it is such a brilliant brilliant brand. So if one looks at the revenue on their 10k they break it down by company owned stores and franchise stores and my understanding is that McDonald’s plans on having 95% of their stores franchised and only 5% company owned they’re reducing the number of company owned stores and they’re they’re franchising more they’re they’re franchising them out and what’s really interesting about this is it’s very similar to the coca-cola company’s strategy on their bottling they’re their reef ranch icing instead of bottling in-house they’re franchising it out and this is weird to me both with coca-cola and McDonald’s. But it just so happens that the franchised stores perform better in the case of coca-cola the franchise bottlers perform better. So it literally the the when McDonald’s franchises out a store to an independent business a local local operator that local operator does a better job managing the business than McDonald’s themselves very interesting to me and in some respects hard to believe. But in others I can totally believe it. Because a local operator when this one store this few stores that they own it is their livelihood is just their bread and butter they know their local community better than anyone they can totally totally do a great job managing that franchise. So I understand it in that respect and I respect it anyways company-owned revenues are way down we’re going from eighteen point six billion in 2012 down to twelve point seven billion in 2017 so going down we’re actually down 32% company owned stores that’s an intentional drop in revenue. Because McDonald’s is reducing their their own company own stores and franchising them out looking at franchise revenue it’s up from eight point nine billion in 2012 up to 10.1 billion in 2017 so it’s up thirteen percent. Now this is important this is not the total revenue that’s driven by these franchise stores I think the total revenue is up in like the seventy eighty billion dollar range this is McDonald’s cut when the franchise store drives revenue McDonald’s doesn’t get all of it they get their cut. Because they’re franchising it out and their cut is what’s represented here and it’s increasing. Because franchise stores are growing rapidly and so very very key point here when you add these up total revenue is actually shrinking for the company. But operating profit it’s actually increasing. I get a lot of comments on this channel there’s a lot of debate around revenue and a lot of folks think that revenue is the most important metric and in general I agree in general I agree that revenue is a very important metric never the most important to me. But up there one of the top few most important metrics. But there are corner cases this is one of them where a company will intentionally shrink revenue and it’s not the end of the world. In fact, the stock price is way up the dividend is way up the company is doing well all while shrinking the revenue. Because they’re going after higher profitability they’re going to drive higher operating profits on a lower revenue base. Because the franchise model works better for them and it’s these these insights that are so counterintuitive to most investors out there and myself included it’s so against the grain. But I love it I love these kind of cases. Because it shows that there are many ways to achieve great results in the stock market and one of them is a shrinking revenue example. So I love that operating income operating income is up 11% when you look at 2012 he was eight point six billion. Now it’s nine point five billion in 2017 and it’ll be higher in 2018 so the operating profit is increasing and I am big on operating profit I think operating profit is really important and it’s a metric I place a lot of weight on and so it’s very nice to see this metric going in the right direction and going up 11% over this time period that I’m sharing in today’s presentation so love that earnings per share are way up way way up it’s up from five point three six in 2012 up to six point three seven in 2017 in growing higher in 2018 earnings per share actually up 19% which outpaces the operating profit growth the reason earnings per share is up faster than operating profit is. Because this company is reducing the number of shares outstanding and they’re doing it quite aggressively they’re doing it actually through debt we’re gonna get to this in a minute with any business that I invest and I like to look at the pros and cons and with this company there actually are some cons and I don’t want to lose sight of them they need to be top of mind for me I need to pay respect to them I need to be observant of them and one of the cons is the debt that we’ll get to in a minute. But the reason earnings per share I don’t take too seriously here is the reason they’re up so much is share counts reduced through share repurchases which are being financed through debt and one day that debt is gonna have to get paid down hopefully it’ll just be done through cash flows so that they don’t have to issue more shares did too so. But that being said I kind of in in any of these cases where we’re earning per share is way up due to shares being reduced I usually look at the worst case in the worst case is they’re gonna have to reissue shares at some point and then it all reverts back and. So I kind of look at it as a worst case just to to set myself up for no surprises and that’s quite frankly why I look at operating profit our operating incomes so closely. Because it’s it’s not skewed by buy share count and so operating profit 11 percent I think that’s more representative than this 19 percent then I’m seeing with the earnings per share that 19 percent growth so next up dividends my favorite thing in the one of my favorite things in the world are dividends Givaudan checks that can be used to pay the bills and with McDonald’s the the dividends have increased 33 percent since 2012 it’s gone from 287 a share to 383 and obviously since I own it which is longer it’s a more of a seven-year time rise and I’m up 66 percent so it’s nice to see the dividends going up so so quickly what else so here’s something or actually here’s debt as well so we’re talking about pros and cons here I think pros so far, love the reef ranch izing love the the franchised revenue growth love the operating income growth like the earnings per share growth love the dividends growth let’s get to something kind of negative debt debt is way up debt is at twenty nine point five billion dollars as of the end of 2017 it started at thirteen point six in 2012 debt is up 117 percent that is massive that is just massive that being said the market cap of this company is a hundred and twenty eight billion and there I looked at their current ratio it was real high so these guys have more than enough ability to to pay this debt to find it to to have financed this debt to pay it off to pay it off tomorrow if they need to and. So I feel good about it from that perspective the current ratio is good the the debt is not unwieldy at this point that being said I don’t see this company having any sign of retracting or or taking back their approach. In fact, I see it’s it’s more of like a full steam ahead here these guys are all about taking out the debt to buy back shares and it seems like they they talk about that quite a bit in their quarterly reports they’re their annual reports it’s something they’re proud of and. So I think this level of debt will continue to increase and I think they’re fine. Because they have the means to pay it they have the huge market cap the current ratio is good that being said it’s just not for me and in the sense that I’m not a fan of of taking out debt to to buy back shares I’m a fan of buying back shares. But I like to do it through cash flow through earnings earnings if one has to go beyond earnings by taking out debt to buy back shares I just don’t see the point of it I understand why people have done it. Because interest rates have been at historical lows. But we all know. Now that rates are going up and. So this begs the question is rates are higher it’s gonna be harder and harder to refinance this debt at reasonable interest rates and to pay it down and so that is just something that concerns me and like I said there’s a lot of pros. But if there’s a one con that comes up that’s one of them and actually the next line item is going to be my next con which is a bigger con so in their annual report they talk about cash flow and they talk about cash flow from from operations and what I noticed in cash provided by operations it’s actually down over time and. So it was six point nine billion in 2012 and it went down to five point five billion in 2017 and so we’re seeing earnings per share go up we’re seeing operating profit go up. But we’re seeing cash flow from operations go down and. So this is another red flag for me there certainly is no way around this cash flow from operations is down 20%. Now this is based on a cursory analysis if I wanted to I probably want to dig in here to the income statement starts the cash flow statement in in more detail. But I’d be curious if you have any thoughts around that if you’ve been tracking McDonald’s you follow McDonald’s you own McDonald’s what do you think about the cash flow from operations and do you have any insights there as to what’s happening my takeaway is. Because look the market in my opinion is in general it’s an inefficient market opportunities come up from time to time and they come up. Because the market is not fully efficient that being said in big blue chip companies like McDonald’s it’s somewhat efficient it’s somewhat right it’s directionally right and. Because this stock has gone up so much. Because it’s doing so well the the market is not just going to to completely ignore a massive red flag and. So it generally points me in the direction that. Yeah, it’s down. But it’s probably not the end of the world and will probably work its way out over time that being said it’s is that just a general rule of thumb for an investing standpoint it’s important to see operating income up into the right earnings per share up into the right and cash flow cash flow from operations up into the right and so when I’m seeing a little bit of a mismatch here I’m seeing EPS up I’m seeing operating income up. But I’m not seeing cash flow from operations up I’m seeing it down that’s certainly something that I will want to continue to keep a pulse off. But when I just look at it at face value I got a lot of pros. But I got two cons here in the two cons that I have are the debt and the cash flow are they cons that keep me from loving this stock that keep me from making it my number three stock of all time no. Because we’re just looking at a five-year period here and this is a company that truly truly has the power to stand the test of time and they’re showing that they’re they’re turning it around. I mean this company worth noting has had to reinvent itself quite some times many times and we all know even from recent history do Millennials like it do they not I think McDonald’s has finally proved in the world that. Yeah, Millennials do like this company and they’re going to go eat there and McDonald’s has also proven via some of their more premium items we’ll get to this in a minute what customers are willing to go to McDonald’s and buy more expensive foods there it’s not just about fast food it’s about higher quality foods as well and foods that cost more money and so even the all day breakfast menu for example this company is innovative and they have had slumps over the years in same store sales they’ve had challenges from time to time with revenue with customers and they have always bounced back and so the fact of matter is is what I’m trying to illustrate this company has some staying power is some serious staying power so in the shorter run if debt is up. Because they like buying back shares so be it if cashflow is flat or it’s not flat it’s down cash from operations is down so be it although if there is one real red flag out of any of this it’s that cash from operations and so I’m kind of throwing it back there I’d be curious if anyone else has thoughts on that not a deal-breaker for me. But certainly the one big red flag that comes up here in the the kind of more minor red flag is the the debt anyways let’s go down there’s I love this stores the number of stores are increasing and I didn’t break it out here. But in the annual report it breaks down company owned stores versus franchise stores company owned stores is actually decreasing while franchise stores is increasing. But totals. Because franchise stores are increasing so quickly total stores are growing and they’re up eight percent in this period up to thirty seven thousand two hundred forty one stores versus thirty four thousand four eighty in two thousand twelve fabulous I love the fact that this company can grow the number of stores like that and they’re seeing same store sales growth grow we’ll get to that in a minute. But I love that. So this is the high level of it again a lot to love a few things to kind of earmark as things to watch over time and I want to see I want to see over time where this debt goes it’ll probably increase not the end of the world I definitely don’t want to see where this cash from operations goes and something I’ll be watching over the next 5-10 years as I continue to hold and hopefully increase my position in McDonald’s. But I want to get into. Now what do I like about this company operating margin so one can compute the operating margin by taking basically the operating and coming dividing by revenue revenue I have to sum up both the company store revenue and the revenue they get from there they’re cut from franchise stores when I calculate this operating margin it’s 42 percent this in a nutshell is probably the the favorite thing that I have from this entire presentation if there’s one thing you take home take on this this iconic brand can deliver a 42 percent operating margin it does not get much better than that that is amazing that is amazing for this kind of company in the restaurant industry maybe one would see this in a in the software industry. Because to distribute software there’s no incremental cost to to each additional copy. But there’s some big costs to running this kind of business they have to get the food and the cost of food is increasing they have to get the real estate they have to build the stores they have to manage all these franchises think this huge corporate structure the fact that they’ve got a 42% operating margin it’s just out of this world it’s it’s an out of this world operating margin I love it it’s one of the things I love most about this company I cannot get enough of it I love McDonald’s more more of this stuff. So what else. the the franchise saying the reef ranch izing is working so that’s. Something I love we talked about this a lot I don’t want to belabor the point. But the reef franchising is working and it’s evident in the numbers and the operating income increasing over time. So I love that I absolutely absolutely love that what else do I love about this coming the dividend growth it’s um it’s growing we talked about this since I’ve owned it it’s up 66 percent it does not get bunch better than that for a world-class blue chip stable company like this and it will continue to grow something else brand stability this is a world-class stable brand look I’m talking about my number three favorite stock of all time at the top of the pyramid where I’m thinking about my number one two or three favorite stock of all time it has to be a stock that I’m willing to put everything in if I had to I would probably feel comfortable I would feel comfortable putting a hundred percent of my money in McDonald’s and the reason for that is I can sleep at night. Because I know this is a brand that is not going to go anywhere this brand is not going out of business this brand is not going anywhere they have a world-class brand they have a competitive mode there is no one coming in and taking and eating McDonald’s lunch it’s it’s just a a tank this this company and. So I love that stability and that is important to me and quite frankly maybe the dividend growth can be a little higher with another kind of maybe other companies sometimes it’s easier to get an initial value McDonald’s it goes on sale from time to time. But it’s it’s not that frequent and quite frankly the reason for that is I think the investment community realizes the power in the strength of this company and. So I love that what else being following my channel for a while. You know. you know that I love global diversification and what is interesting about McDonald’s is when one looks at the revenue that comes in from US alone it’s about 35% 35% u.s. rest international and so that is really really cool I love that that it’s even more skewed international than us and let’s say it’s a hedge it’s it’s totally a hedge in some respects. Because I have a us-centric portfolio I try to buy companies that are globally diverse that I have that global diversification in and I have owned companies in the portfolio that are globally based. But there’s no way around it on us-centric and so knowing that my my number three favorite dividend stock of all time has only 35% of its revenue coming from the US that is just fabulous what else do I love about this company real estate I love this I picked this up I think from a Forbes article or was some article I was reading on the Internet out of all their stores these guys own 45% of the land and 70% of the buildings this is not just a fast-food company this is not just a restaurant this is a real estate company and we’ve all heard that before people talk about McDonald’s they’ve got some of the best real estate in the world and that real estate has a lot of value and what they’re doing. Now that they are Reef Ranch izing what’s great is they own this real estate and they’re leasing it they’re leasing it to the franchisee so those that are franchising out know franchisees of McDonald’s. Now they are renting from McDonald’s they land the buildings in many cases and McDonald’s is earning a royalty a landlord a passive income if you will on that the state each and every month and. So I love that I love that about this business that they’ve got that real estate locked up in honestly that may be why this stock has done so well also is real estate has been an asset class that’s done really well in the past I’d say five ten years where it’s always been an asset that’s done well. But I feel in the last five ten years it’s really coming to the forefront especially prime real estate amazing real estate incomparable real estate and that’s what McDonald’s has it has they have an operating principle they don’t take the second best location they have to have the best location and they’ve tied it up they’ve tied up that real estate and. So I love that about this company and I think it’s a core differentiator and I think it’s just a world of value at this point that could never be replicated thank you that that value just it would be so hard for someone else to replicate at a reasonable cost what do I dislike about this company share buyback I don’t love a share buyback. But the they’re just using debt to finance it and. So I have to take this earnings per share growth with a grain of salt and then the cash flow obviously is a con it’s just. Something I want to dig into further and learn more about over time it’s not a deal breaker. But look there’s no stop no stock were coming in the world where everything is a green light all the time there’s always going to be some green lights and one or two red lights and this has got one or two red lights. But I’m able to look past them so before in the article today I want to also talk about their latest earnings report they just reported earnings recently from the first quarter of 2018 and the trends continue and so one thing that’s really important in the restaurant industry or in retail in general is this concept of same store sales our sales increasing not just. Because they’re deploying more stores but. Because of sales actually increasing in the same store in one store comparable this year versus the next our sales increasing and McDonald’s is experiencing some really great same store sales in the u.s. they’re up 2.9 percent when you look at q1 of 18 versus q1 of 17 they’re up 5.5 percent when one compares q1 of 18 versus 17 internationally globally so they are seeing success with their same store sales and they are attributing a lot of this actually just some of the higher cost items on the menu it seems like consumers are gravitating just towards some of some of the more premium items and so that experimentation they’re doing is working out in their favor one thing worth mentioning is the earnings per share q1 of 18 verses 17 its way up it’s up 17% year over a year this is one of the reasons the stock is doing so well it has that high p/e. Because they’re growing so quickly when one factors out though currency fluctuations they look at currency apples to apples year-over-year earnings per share actually only up 12% year over year. But still 12% year over year is just fabulous it’s wonderful that being said some of that is driven by the share buybacks if one looks just at operating income which does not factor in those share buybacks it’s up 5.4 percent year-over-year when one factors in when one looks at q1 of 18 verse 17 I’ll take that any day of the week 5.4 percent operating income growth year over year for a world-class company like McDonald’s in my opinion that is just fine it’s great and I love it. So what else. one last point here worth noting is the the market cap it’s a hundred and twenty eight billion dollars son my pin it’s a good size it’s stable it’s not going anywhere. But it’s not so big where this company cannot continue to grow I think they have room to grow I think they will continue to grow and I’m excited about that so I’d be curious what do you think about McDonald’s please include that in the description below I love the comments I try to respond to all of them and the support the support here in this community is just fabulous it means the world to me and if you enjoyed the article today I please invite yo

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