6 Stocks Making Most of Invested Capital

You know it's a sour economy when you're too frugal for McDonald's (MCD). I find the Big Macs and fries plenty cheap (although, adjusted for the present value of my future cardiac care, a hamburger and yogurt parfait might be better values). But the stock, while by no means lavishly priced, leaves me hankering for something just a touch cheaper.

If you've owned the stock over the past year, you're thrilled. Shares are down just 3%, while the broad market has lost 42%. Add your dividends and you've nearly broken even. Moreover, the news is all good. Sales at longstanding McDonald's restaurants -- there are more than 30,000 the world over -- increased more than 5% in October vs. a year earlier. Pinched consumers are forsaking Starbucks (SBUX), Old Navy, vacations and the local movie theater, but they've never been happier with Happy Meals. And the arches have never gathered more gold: Per-share profits this year are expected to total 25% more than last year. This, as profits at America's biggest consumer discretionary companies -- those that sell things we want but don't need -- are on pace to plunge 37%.

Much as I'd enjoy scolding a clown, Ronald McDonald is, financially speaking, beyond reproach at the moment. Margins are far plumper this year than last. Cash flow is plentiful, suggesting the company's impressive profits are the real kind, not merely the paper kind. Lately I've devoted plenty of column space to badgering mature companies for bigger dividends. McDonald's increased payments by a third in September. Its yearly payment will work out to more than half of profit -- respectable. Lately the company has spent plenty more to repurchase stock.

Also, McDonald's is in a better position than most companies to justify the portion of profit it withholds. It turned up recently on a search for impressive returns on invested capital. Over the past year, it has turned each dollar it put to work into $1.19.

Two things trouble me about the stock, though, and both are our fault. We simply love McDonald's too much. The valuation of 16 times forecast 2008 earnings that we have afforded its shares is ambitious for such a large company, especially at a time when the broad market goes for 12 times earnings. The full valuation means McDonald's dividend, while generous enough relative to profit, is only ordinary relative to the stock price. Current yield: 3.6%.

If next year's growth looks like this year's, McDonald's stock price will prove justified. But I'm worried that the company's world-beating improvements in same-store sales will be difficult to top. Consumers might be spending down from the Olive Garden to burger chains at the moment. But if the economy worsens and families must cut back further, there are cheaper meals to be found than McDonald's. (Anyone else grow up on tuna fish sandwiches for lunch and spaghetti and tomato sauce for dinner?)

All told, McDonald's is a superb operator, but I'm not sure a premium of a third to the market is warranted. Should shares fall to $45 or so, consequently fattening the dividend yield, I'd chow down.