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HarryCaraysGhost (99.63)

What's better for you a happy meal, or an Apple?

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May 13, 2012 – Comments (14) | RELATED TICKERS: MCD , AAPL

Hello fellow Fools,

I hope everyone is enjoying Mothers day. We had a nice brunch followed up by frisbee in the backyard. But thats not why I'm writing this blog.

I'm writing this because I gave my niece and nephew a homework assignment-

Pick a corporation with a huge moat (I gave the investopedia definition of moat) that will still be around in forty years. $1,000 invested

My nephew picked Apple, seems like a nice safe pick, but I have one problem with this. No Dividend. I work under the assumption that Mr Market is my schizophrenic next door neighbor (props to Ben Graham) So how could I value what a thousand dollar investment would be worth in forty years?

My neice picked Mcdonalds (I was quite proud that she picked a dividend aristocrat)

So I typed in the #'s to my handy dandy dividend calculator-

http://www.dividend-calculator.com/quarterly.php?yield=2.80&yieldgrowth=17.45&shares=10.8873992&price=91.90&years=40&do=Calculate

Starting yield- 2.80%

dividend growth rate- 17.45% (o.k this is probably where I made a mistake, I used the 5yr growth rate from TMF) Should I be typing in another number?

Number of shares held- 10.8873992

Cost pr/srh- $91.90

years to hold- 40.

Result- $317,021,789,661,613,069,930,567,151,350,972,416 

I KNOW!! THATS INSANE. How much money is that, gotta be close to the national debt.

I just wanted to point out to them that time,time time is on their side, yes it is.

Thanks in advance for all replies.Especially those that show my calculations to be correct or incorrect, and anyone who can make the case for Apple over a forty year timeframe. (just remember that kids will be reading this:)

Cheers and if you have'nt already go hug your Mother.

 

14 Comments – Post Your Own

#1) On May 13, 2012 at 6:58 PM, yonkmember (72.10) wrote:

I think using the historical growth rate is way too optimistic.  Micky D's cannot sustain that dividend growth.  I would use a much more conservative rate of 8--10% for the near/mid term and potentially even lower in the mid/far term, say 6--8%.  MCD has some major growth potential (which is why I am LONG MCD), but the dividend growth is ultimately coupled to the EPS growth.  In the near term, when a company has a low payout ratio, the EPS and dividend growth rates might diverge, but over the long haul, especially 40 years (!), these should move together. 

 Oh, one more thing... try to use low-end projections to enhance your safety margin for these calculations (Not every company is AAPL).   

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#2) On May 13, 2012 at 7:01 PM, Mega (99.96) wrote:

"My nephew picked Apple, seems like a nice safe pick, but I have one problem with this. No Dividend."

http://www.apple.com/pr/library/2012/03/19Apple-Announces-Plans-to-Initiate-Dividend-and-Share-Repurchase-Program.html

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#3) On May 13, 2012 at 7:19 PM, Mega (99.96) wrote:

And even assuming 17.01% earnings growth + 17.45% dividend growth for 40 years (which is wacky assumption), your MCD number is around 25 orders of magnitude wrong.

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#4) On May 13, 2012 at 7:53 PM, HarryCaraysGhost (99.63) wrote:

Mega what do you think, apples dividend growth rate should be so I could plug in the #'s?

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#5) On May 13, 2012 at 7:58 PM, yonkmember (72.10) wrote:

I would also consider doing the calculation where you only put in the growth rate that exceeds an *expected* inflation rate, to try to get a handle on how much extra "purchasing power" the growth might really allow.  And yeah, the number you returned is many orders of magnitude off... 

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#6) On May 13, 2012 at 9:49 PM, Mega (99.96) wrote:

40 years is a long time.  I'd guess 6% growth over inflation for both MCD and AAPL.  Apple's growth potential looks more explosive, but of course less certain.

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#7) On May 13, 2012 at 11:07 PM, rd80 (97.59) wrote:

Good on you for helping the next generation learn something about finances and investing.

I think that dividend calculator site must have a mistake or a hidden assumption.  I'd bet they don't take an estimate for share price appreciation into account (since there's no place to enter a value for it), which would buy more shares at dividend reinvestment.

I just set up a spreadsheet.  Assuming the numbers you input for MCD, an 8% annual stock price appreciation and reinvesting dividends $1000 invested today would build to something like $40+ million and would be spitting out over $35 million/year in dividends.  The same setup, but with no share appreciation spits out $2e+18, I think that's still way off your #, but I'm only compounding annually and that would make a big difference.

I agree with the some of the other comments; a 17+% dividend growth rate isn't sustainable over a multi-decade time span.  In fact, over the last few years MCD's divvy raises haven't been 17%, more like 10-11%.  

The same spreadsheet, but with an 8% div growth rate (still optimistic for 40 years IMHO) with the 8% share appreciation rate and the numbers drop to an investment value of $66k and annual dividend payout of $2k at 40 years.  Still not too shabby for a $1k investment that's just left alone to grow.

No guarantees I didn't fat finger something in the worksheet.

Disclosure:  Long MCD

 

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#8) On May 13, 2012 at 11:56 PM, JordanJohnnn (< 20) wrote:

just as Josephine implied I am surprised that anyone able to get paid $7294 in one month on the internet. did you look at this link (Click on menu Home more information)  http://goo.gl/q9Xa6

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#9) On May 14, 2012 at 1:06 AM, HarryCaraysGhost (99.63) wrote:

^ luckily spam was not on our brunch menu.

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#10) On May 14, 2012 at 9:11 AM, Valyooo (99.43) wrote:

HCG,

If what Josephine implied was correct, $7294 in a month is a much better investment than apple or mcdonalds.

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#11) On May 14, 2012 at 11:57 AM, RallyCry (< 20) wrote:

I think Josephine works for Amway.

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#12) On May 14, 2012 at 1:18 PM, lemoneater (69.98) wrote:

I was going to say apple, not the company, but the fruit. Johnny Appleseed left a wonderful legacy of apple trees across the U.S. Every fall when I eat apple cider donuts I think that nothing could be more delicious.

Sometimes investing for the future is as simple as planting a tree :) 

Have a great day!  

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#13) On May 14, 2012 at 2:19 PM, AdirondackFund (< 20) wrote:

It is time to buy, so somebody got that part right.

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#14) On May 14, 2012 at 6:59 PM, L0RDZ (80.14) wrote:

Okay I am  somewhat joking  with this,  but does  said calculator  calculations   have  end of the world predictions  like  say  dec  21 2012  doomsday  scenarios ??

If you think in terms of a year, plant a seed;

 if in terms of ten years, plant trees;

if in terms of 100 years, teach the people.

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