Bill Ackman of Pershing Square Holdings and Andreas Halvorsen of Viking Global Investors are two highly respected billionaire-level asset managers. In the second quarter, their firms added new positions in two stocks that happen to be members of the prestigious Dow Jones Industrial Averagean index that tracks 30 blue chip stocks.
Ackman’s firm reported a $229 million position in Nike (NYSE: NKE)while Viking Global announced a $478 million investment in McDonald’s (NYSE:MCD)Let’s take a look at why these billionaires like these stocks so much, as both companies currently face headwinds in the apparel and restaurant industries.
1.Nike
Ackman has a knack for spotting value where others don’t. Over the past 20 years, Pershing Square has delivered an annual return of 16% and grown its net worth to $9 billion in recent years, according to Forbes.
Nike stock has fallen 53% from 2021 highs, prompting Ackman’s Pershing Square to open a new position in Q2. The top sportswear brand has been hit by weak consumer spending trends that have challenged several retailers in recent years.
Nike is a big company, generating $51 billion in annual revenue, two-thirds of which comes from footwear. Revenue for fiscal 2024 (which ended in May) was flat year-over-year. However, most of the weak sales trends are related to Nike’s lifestyle products. Nike’s performance sports products and services still saw double-digit sales growth last quarter.
This suggests that Nike can clearly improve if it shifts more of its sales mix to performance products, such as running and basketball shoes, which have been the core of the brand for 50 years.
Meanwhile, Nike is maintaining profits to boost dividend payments to shareholders. Net income grew 12% in fiscal 2024, and it paid out 38% of its profits in dividends. At its current quarterly payout of $0.37 per share, Nike’s forward dividend yield is 1.76% — its highest in a decade.
The stock still trades at a reasonable valuation, but its forward price-to-earnings (P/E) ratio is 26, which isn’t cheap. Still, it’s a fair price for a top brand that can still grow its earnings by double digits over the long term.
The recent investment suggests that Ackman believes Nike’s brand is currently undervalued by investors. Nike has a clear solution to return to growth by doubling down on innovation within its sports categories, and good execution of this strategy could send the stock back to its previous highs within the next two years.
2. McDonald’s
According to Forbes, Andreas Halvorsen, founder and CEO of Viking Global Investors, has a net worth of $7.2 billion. The company manages a large U.S. stock portfolio, worth $26 billion at the end of Q2. Among the new positions is a $480 million stake in McDonald’s.
Like Nike, McDonald’s reported weak sales amid macroeconomic headwinds this year. Because this weakness is spread across multiple sectors, it does not reflect negatively on McDonald’s competitive position. This environment plays to McDonald’s strength as a values-based brand.
The Golden Arches reported a 1% year-over-year decline in global comparable sales in Q2. Despite this weak performance, the stock has held up well this year and is poised to hit new highs. The reason for the stock’s performance in the face of weak sales could explain why Viking Global likes it.
McDonald’s is more than just fast food. It’s also a real estate company. It has a long history of owning the land on which its franchise restaurants sit, which presents lucrative opportunities to leverage these real estate values ​​to ultimately drive profitable growth for shareholders.
As of December 31, 2023, the company had $20 billion in owned buildings and improvements on its own land on its balance sheet. It owned approximately 57% of the land and approximately 80% of the buildings occupied by its restaurants.
McDonald’s plans to expand its global restaurant count to 50,000 by 2027, and the company will of course leverage McDonald’s real estate expertise to do so.
The combination of its franchise model, where 95% of restaurants worldwide are locally owned, and its real estate strategy enabled McDonald’s to generate a high margin of $8 billion in net profit on $25 billion in revenue last year.
While McDonald’s reported an 11% year-over-year decline in profit in the latest quarter, it pays out about half of its profits in dividends. It currently pays a quarterly dividend of $1.67, which gives it a forward yield of 2.3%. That dividend seems pretty safe, given the manageable payout relative to earnings and McDonald’s profitable franchise business strategy.
The above-average dividend yield and attractive forward price/earnings ratio of 24 make the stock a solid buy for the long term.
Should You Invest $1,000 in Nike Now?
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John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nike. The Motley Fool recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.
These Top Billionaires Just Invested $700 Million In 2 Dow Jones Dividend Stocks was originally published by The Motley Fool
