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Why McDonald’s Shares Have Remained Firm

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McDonald’s shares have remained firm

Previously, we saw that despite declining same-store sales growth, McDonald’s (MCD) share prices have remained firm over the past few years. Year-to-date, the stock is up 5%, and currently it is trading at ~$97 levels. In this part, we’ll look at some of the reasons why shareholders have shrugged off the weakening McDonald’s fundamentals.

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Strong value play

McDonald’s still generates significant cash flows, and the management is committed to return about $8 billion to $9 billion through 2017 to shareholders by means of dividends and share repurchase programs. As you can see in the chart above, McDonald’s also has one of the best dividend yields compared to its peers Yum! Brands (YUM) with a yield of 2.3%, Wendy’s (WEN) with a yield of 2.1%, and Starbucks (SBUX) with a yield of 1.75%. This gives investors another reason to hold on to the stock. The Consumer Discretionary Select Sector SPDR (XLY) has a 4% exposure to McDonald’s.

Real estate

As of 1Q15 ended March 31, McDonald’s had about $37.5 billion in property and equipment on its balance sheet. This amounts to about 40% of the company’s market cap of $93.8 billion. The value of this property as reported on the balance sheet is at cost, which may be way below the real value of the property. Recently, there has been discussion of spinning off these properties to a REIT (real estate investment trust), with activist investor William Ackman, CEO of Pershing Square Capital Management, acquiring a stake in the company.

Previously, McDonald’s has opposed the idea of turning these properties into a REIT, saying that it will weaken the relationship with the franchise. However, investors might be more optimistic, as the new management is open about ways to turn the company around.

New management

McDonald’s has a new CEO, Steve Easterbrook, who recently rolled out a turnaround plan, and stated, “I’m concentrating on turning the business around, and I’m also focusing on modernizing our business model to prepare us for the next chapter of our history.” This may have also heightened hopes for McDonald’s. Next, we’ll discuss some of the key points of this recently announced turnaround plan.

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