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Big Dividends From the World's Best Real Estate Portfolio

By Tom Dyson, publisher, The Palm Beach Letter
Tuesday, April 17, 2007

Pulling out of a McDonald's drive-thru the other day, I told my friend that I thought McDonald's was a great investment.

"No way!" he said. "After Super Size Me, I'm sure their fortunes are on the way down. There's no way I'd ever eat there. And I certainly wouldn't take my kids there."

He'd just confirmed my thesis.

If you haven't seen Morgan Spurlock's movie Super Size Me , you should. It's a documentary about a guy who eats and drinks nothing but McDonald's for 30 days.

He puts on 25 pounds, suffers severe liver dysfunction, and develops symptoms of depression and sexual dysfunction. The film earned $11.5 million at U.S. box offices, making it the most financially successful documentary ever.

As a business, I put McDonald's in the same category as Philip Morris or Monsanto. People love to hate it.

McDonald's opened for business in 1956. It first listed on the stock market in 1965. The next 40 years of the company's history reads like an MBA case study.

McDonald's has more than 30,000 restaurants in 119 countries. It is the world ambassador of American fast food. I've heard that McDonald's is the most widely known word in the English language after "OK" and "Coke."

More than any other company, the McDonald's brand symbolizes American culture.

Check out these statistics:

This company has - at one time - employed one out of every eight workers in the U.S.

This company is the largest private operator of playgrounds in the United States, as well as the single-largest purchaser of beef, pork, potatoes, and apples in the country.

If you'd invested $1,000 in McDonald's on the day of its IPO and held it to today, your stock would be worth $134,660.

Problem is, McDonald's also attracts all sorts of criticism. Here's a selection of topics I've heard over the years:

  • The way McDonald's prepares food could spread food-borne disease.
  • McDonald's is cruel to animals.
  • McDonald's causes obesity and kills people.
  • McDonald's has ruined the American landscape.
  • McDonald's uses unfair business practices.
  • McDonald's markets unhealthy products to children.

In the late 1990s, the movement against globalization gained popularity. McDonald's was a primary target. I remember French farmers burning a McDonald's restaurant to protest reduced farming subsidies. And in London, I remember anarchists trashing a McDonald's restaurant in the May Day riots.

In 2001, Eric Schlosser's book, Fast Food Nation, came out, piling more criticism onto McDonald's.

The public-relations quagmire came at a bad time. In the period between 1996 and 2004, the United States fast-food market reached saturation, and competition was eating into margins. Earnings fell for six consecutive quarters in 2001 and 2002 and - for the first time in the company's history - McDonald's had to cut its dividend.

Wall Street was furious. Major institutions, such as Fidelity, dropped McDonald's stock like a greasy French fry. Analysts downgraded ratings and declared McDonald's no longer a growth stock.

One analyst - Marie Driscoll of Argus Research - not only slapped a sell on the stock, she dropped coverage of it because clients were no longer interested.

While Wendy's, Pizza Hut, KFC, Taco Bell, and the other restaurant chainswere making new 52-week highs, McDonald's stock fell from $95 all the way down to $16 by March 2003.

A few months later, Spurlock would begin his "McDiet" and nearly every financial publication would have declared the death of McDonald's.

You already know what happened next...

McDonald's stock quietly formed a bottom around $20 per share and started moving up...

Most people don't realize it, but McDonald's is not a burger-flipping restaurant chain; it is one of the world's best real estate portfolios. Franchisees flip the burgers. McDonald's simply owns the best commercial property all over the world and collects 8% annual royalty fees from its tenants. Since November 2002, McDonald's dividend has risen 425%...

Said another way, McDonald's is the ultimate income play.

You may not like its food, but when you consider McDonald's fabulous undervalued property portfolio, the public's negative sentiment, its relentless dividend growth, and all the cash it spins off, you ought to consider its stock...

I recommended this stock to readers of my newsletter, The 12% Letter, in November, and we're already up 17% including dividends. Even though the stock is up, it's still a buy.

Good investing,

Tom




Market Notes


THE NEW PLATEAU FOR GOLD PRICES

The stretching began in late 2005.

Gold – which had been in one the most orderly bull markets in history from 2001 to mid-2005 – started a breathtaking run in November '05, climbing to $720 an ounce in just nine months. The 60% gain pulled gold well off its long-term trendline.

Giant moves like these are followed by brutal corrections almost without fail. Often times, an asset will trade down to its trendline for a test of who has the guts to hold on. We wrote several times in these pages that we wouldn't be surprised to see our favorite catastrophe hedge decline to the low five hundreds. That decline hasn't happened. Gold has plenty of friends and buyers where it is now.

Now that gold has refused to return to its old trendline for a good, long time, we've reached a new conclusion: You can throw that old trendline in the garbage. Mark the high six hundreds as gold's new comfort level.



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