Quality Perception Problem Could Hang Over McDonald’s and Mutual Funds That Own Shares

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Quality Perception Problem Could Hang Over McDonald’s and Mutual Funds That Own Shares

Jul 22, 2014

Fast-food giant McDonald's (MCD) quarterly profit slipped about 1 percent as comparable sales in its struggling U.S. business fell. Per-share profit rose to $1.40 a share, but below analysts surveyed by FactSet who were looking for profit of $1.44 a share. The company’s U.S. sales at restaurants open at least 13 months fell 1.5%. The U.S. business accounts for 30 percent of the fast-food giant's overall revenue.
With the shares slipping early this morning, the shares are now trading below where the stock was at the beginning of the year. Despite the poor sales, the company does have room to raise its dividend, with the payout ratio being a tad over 50%, as well as the ability to do share buybacks. Now this strategy can help the shares avoid a big pullback, but unless the company can bring customers back and stave off the assault from tastier competitors (Chipotle Mexican Grill being the best example), the long-term sales trend may be quite a cloud hanging over mutual fund investors.

Funds with Heavy McDonald’s Ownership

Speaking of mutual funds, there is no fund family betting bigger on McDonald’s than Vanguard. The mutual fund giant has four of the top five largest-positions in the fast food behemoth:

Vanguard Total Stock Market Index Fund (VTSMX) owns over 15.7M shares.
Vanguard 500 Index Fund (VFINX) owns 10.1 M shares.
Vanguard Institutional Index Fund-Institutional Index Fund (VINIX) owns 9.9M shares.
Vanguard Dividend Growth Fund Investor Shares (VDIGX) owns 6.32M shares.


The Bottom Line

If the recent sales slide continues, shares could be set up for a late-’90s swoon that eventually saw the stock give back more than 60% of its value. We’ll be watching to see how mutual fund managers reassess their positions and if they see current troubles continuing.

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