McDonald’s shares remain golden, despite stiff restaurant competition

Question: We hold shares of McDonald’s Corp. in my son’s college account. How strongly do you see them performing?

Answer: In this, the summer of its new fruit-flavored yogurt smoothies, the world’s largest restaurant chain is having a smooth ride.

The latest offering in its McCafe drink line represents another in a long line of aggressively marketed items. Although McDonald’s hasn’t displaced Starbucks in the premium coffee market, it has made its mark as a noteworthy rival in that field.

McDonald’s (MCD) shares are up 14% this year after last year’s 4% gain. The company is in excellent financial shape with strong cash flow and a history of paying cash dividends and repurchasing shares.

For decades, investment experts speculated as to when McDonald’s would ultimately falter and lose appeal. After all, it does face fierce competition and price wars with countless restaurant groups, such as Burger King, Subway, Yum Brands, Jack in the Box and local chains.

It is subject to fluctuating costs of food, energy and international currency, as well as trends in the labor and credit markets in its cyclical industry. The fast-food business is also a frequent target of organizations fighting obesity and urging more healthful eating.

The negative speculation about a future downfall has proved to be inaccurate. The company remains dominant with nearly 33,000 store locations in 117 countries, in which it usually has the leading market position. About 26,000 units are operated by franchisees and affiliates. The remainder are company-owned.

The consensus rating of McDonald’s shares is “buy,” according to Thomson Reuters, consisting of nine “strong buys,” seven “buys” and six “holds.”

The global momentum of the golden arches continues and future opportunities abound. Despite Europe’s economic woes, sales in that region continue to do well. U.S. sales have also been recovering this year.

McDonald’s, whose chief executive has been Jim Skinner since 2004, remains an internationally famous brand with marketing savvy for big events. For example, it recently aired commercials on “The Decision,” the much-watched hourlong ESPN special about LeBron James signing with the Miami Heat, in exchange for its donations to the Boys & Girls Clubs of America.

The company has remained relevant by taking steps such as extending hours, offering free wireless Internet access and remodeling restaurants. Although not every product launch has been successful, recent premium products such as the Angus Third Pounder hamburger have done well.

Earnings are expected to increase 13% this year and 8% next year, with a five-year annualized forecast of 10%.

Question: Is Fidelity Dividend Growth Fund worth keeping in my retirement account?

Answer: Despite its name, the primary goal of this fund is beating the stock market rather than seeking high dividends. It should therefore be considered a high-quality, growth-oriented, mid- and large-cap growth fund offering diversity through more than 500 holdings.

The $7.5-billion Fidelity Dividend Growth Fund (FDGFX) is up 21% over the last 12 months, ranking in the top one-tenth of large growth and value funds. Its three-year annualized decline of 8% places it in the upper one-fourth of its peers.

“Portfolio manager Larry Rakers is a little more aggressive than average and the fund is really more of a bull market fund,” said Mark Salzinger, editor of the No-Load Investor newsletter in Brentwood, Tenn. “While he is a good manager, he has struggled over the past six months because the market has come down and the fund is also pretty volatile.”

The focus of Rakers, portfolio manager since September 2008, is on growing companies expected to have rising future dividends. He invests in all kinds of stocks that look attractive to him and has high portfolio turnover. His prior six-year track record at Fidelity Balanced Fund, where he handled the stock portion, produced excellent results.

Fidelity Dividend Growth had been concentrated in huge companies with stable performance under previous manager Charles Mangum, who ran it from 1997 to 2008, before Rakers took over and made changes. Its all-cap emphasis now means it isn’t as likely to take off when the largest-cap stocks rule the market. Yet having such diversity means it won’t get hammered when any one stock does poorly.

Financial services represents about 18% of the portfolio and industrial materials 15%. Other concentrations are hardware, energy and healthcare. Top holdings were recently Wells Fargo Co., Apple Inc., JPMorgan Chase & Co., Bank of America Corp., General Electric Corp., Cisco Systems Inc., Hewlett-Packard Co., Merck & Co. Inc., PNC Financial Services Group Inc. and Lam Research Corp.

This “no-load” (no sales charge) fund requires a $2,500 minimum initial investment and has an annual expense ratio of 0.62%.

Question: Please explain cost basis of a stock for tax purposes. How is that handled with an inheritance?

Answer: Cost basis is the price initially paid for a stock, adjusted for stock splits, dividends and capital distributions.

When you sell, you will owe tax on the capital gain — the difference between what you paid including brokerage commissions and sale price. There is no tax issue with an individual retirement account or 401(k).

Although it is recommended that an investor keep records of what was paid, often your broker or financial advisor will have the information.

“For an inheritance, if a person died before 2010, the cost basis of the stock is the price on the day the person died,” explained Bridget Sullivan Mermel, a certified financial planner in Chicago. “However, if you inherited stock from someone who died in 2010, the cost basis is what the deceased paid for the stock.”

That’s because Congress let the estate tax lapse for this year. The tax treatment will return to the previous formula in 2011. That means that for 2010 you’re going to have to look a bit harder to find what the deceased paid for the stock, she said.

Andrew Leckey is a columnist for Tribune Media. He answers questions only through the column. Address inquiries to Andrew Leckey, 555 N. Central Ave., Suite 302, Phoenix, Ariz. 85004-1248, or by e-mail at andrewinv@aol.com.