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By Josh Peters, CFA and Jeremy Glaser | 10-22-2014 02:00 PM

Are These 3 Dividend-Payers Still on Track?

Morningstar’s Josh Peters sizes up the disappointing results from McDonald’s and Coke, and GE’s nice surprise.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm here today with Josh Peters. He is the editor of Morningstar DividendInvestor newsletter and also our director of equity income strategy. Some of his portfolio companies have reported earnings recently, and we're here for his take on if they are still on track. Josh, thanks for joining me.

Josh Peters: Good to be here, Jeremy.

Glaser: Let's start with McDonald's (MCD). This was certainly one of the more disappointing reports we've seen recently. They are under a lot of pressure. Could you talk a bit about what kinds of headwinds McDonald's is facing now and if it has really changed your investment thesis at all in the company?

Peters: Well, like a lot of big multinational companies, you do have exposure to a lot of economies that are now weaker than the United States, especially Europe. You've also got the effect of the strong dollar on results, which is negative from the standpoint of a U.S. company and its U.S. shareholders. But McDonald's just seems to have lost that magic touch.

They had such a terrific run there from 2003 or 2004 until about 2011 or 2012. It happens I bought right at the end of that run. One of the things they did during that period was become much better at capital allocation, stepping up the dividend dramatically, creating what is now a very attractive dividend yield that I think is quite secure. But earnings are not growing.

In fact, with some of the specific challenges that they've had here this year, including the food-safety scare in Asia, earnings are down. And some of these things will just wash out. They will lap the comparisons with the food-safety scare. That will go away. McDonald's has changed its supply chain. There is no reason to think that needs to recur. So, it will get those customers back. But how do you engage with customers in the United States and in Europe where you didn't have a specific issue, but your comparable store sales are still falling? What's going to bring those people back?

I frankly don't know. And at this point, to continue owning McDonald's is really expressing a lot of faith in the dividend, which I think is secure, and also what we think is still a wide economic moat. They just have such strong competitive advantages relative to other large restaurant operators. But there is some sense that maybe that moat is under attack, and maybe some other chains, like a Chipotle, have come up with ways of getting people good food fast that McDonald's has not figured out how to replicate or compete with yet. So, that one is kind of a tough one.

And I think that it's still a buy--a stock that you can own for income at this point--but I think you also have to have in mind that they need to start to showing some kind of progress here in, let's call it, another 12-month type of window or you're really going to have some real strong questions that could be very difficult to answer about the company's competitive position going forward.

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