Bill DeShurko, manager of Covestor’s Dividend and Income Plus model, calls McDonald’s (MCD) a low-volatility, high quality value play — precisely why he’s LOVIN’ it, and plans to add it to his model.
Low volatility investments have been DeShurko’s MO since early April. Since turning defensive ahead of the market decline, there is not a stock in the Dividend and Income Plus portfolio with a beta (or volatility) greater than the market, he says.
McDonald’s now has a beta of less than 0.5, meaning it’s less than half the volatility of the market. Yet it still offers a dividend yield of nearly 3%, higher than the average dividend-paying stock of the S&P 500, at about 2.1%.
One reason for the low volatility is that McDonald’s has been a laggard this year. About 39% of the restaurant chain’s revenue comes from the U.S.; only about 32% comes from the U.S. So the stock has suffered more than its U.S.-centric peers on fears amid slow European economic growth.
Yet DeShurko notes that those fears have played out in the stock’s valuation. At a forward price-to-earnings ratio of 14.6, McDonald’s is now trading at a discount to restaurants including Jack In the Box (JACK) at 15.6 times earnings, Papa John’s International (PZZA) at 16.5 times, Yum Brands (YUM) at 18.4 times.
And none of those peers can match McDonald’s reign as one of the most respected global brands; it was No. 4 worldwide in the latest Millward Brown study.
One potential catalyst going forward is McDonald’s technology advantages versus its peers, which could make restaurants even more efficient. That was the focus of a company trip this month among the analysts covering McDonald’s.
Oddly, Facebook (FB) has roughly the same market cap as Mickey D’s.
And while Facebook remains a hot topic and a cold stock, McDonald’s is a fairly cold topic, yet a stock that DeShurko thinks could start to warm up.
