Michael Fowlkes' Analyst Insights
Options and ETF Analyst Writer
September 19, 2016 - McDonald's May Announce Dividend Increase
Fast food leader McDonald’s (MCD) has an impressive 39-year streak of dividend increases, and it may extend that streak as early as this week. MCD shares have been stuck in a fairly tight sideways pattern so far in 2016, with shares down a modest 2.5% on the year.
MCD was recently trading at $115.19, down $16.77 from its 12-month high and $19.41 above its 12-month low. Technical indicators for MCD are bearish and the stock is in a weak downward trend. The stock has recent support above $114.10 and recent resistance below $119.25. Of the 23 analysts who cover the stock, eight rate it a "strong buy", one rates it a "buy", 12 rate it a "hold", one rates it a "sell", and one rates it a "strong sell". The stock receives S&P Capital IQ™s 4 STARS "Buy" ranking.
Historically, McDonald’s has announced its dividend increases during the third week of September, but it did stray from that schedule last year, waiting until mid-November to announce its increase last year. I expect the company to return to its normal schedule this year, and believe the company will announce its next increase this week. The company has a payout ratio of 63.9%, which is a bit high, but not too high to keep McDonald’s from joining the exclusive list of companies with 40-year streaks of dividend increases. Last year the company boosted its dividend by 4.7%, and in the previous year it raised its distribution 4.9%. Given the high payout ratio, I would expect a similar increase this year as well. Look for the quarterly distribution to rise from $0.89 per share to $0.93, which would translate to an increase of 4.5%. The news could come as early as this week, with the stock trading ex-dividend during the final week of November. Last year it moved the announcement back until the second week of November, but the ex-dividend date range did not change, so even if the company does postpone the announcement, the stock should still trade ex-dividend during the final week of November.
Stock Only Trade
If you're looking to establish a long stock position in MCD, consider buying the stock under $115.25. Sell if it falls below $103.75 or take profits if it gets to $132.50.
If you want to set up a bullish hedged trade on MCD, consider a November 95/100 bull-put credit spread for a 20-cent credit. That's a potential 4.2% return (24.1% annualized*) and the stock would have to fall 13.0% to cause a problem.
If you want to take a bearish stance on the stock at this time, consider a November 125/130 bear-call credit spread for a 25-cent credit. That's a potential 5.3% return (30.5% annualized*) and the stock would have to rise 8.7% to cause a problem.
Covered Call Trade
If you like the stock, but wish to lower your cost basis on a new position, you may want to consider a December $120.00 covered call. Buy MCD shares (typically 100 shares, scale as appropriate), while selling the December $120.00 call for a debit of $113.75 per share. The trade has a target assigned return of 5.4%, and a target annualized return of 21.9% (for comparison purposes only).
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