McDonald's (NYSE: MCD) definitely didn't price last week's bond issue off the Dollar Menu. The company issued new 10-year bonds with only a 3.5% coupon, and The Wall Street Journal reported the issue had the lowest interest rate for a 10-year U.S. corporate issue in at least 15 years.
The bond pricing is interesting since McDonald's stock yields more than 3%, and if it continues its trend of annual increases, the payout will be super-sized again this fall. Odds of those bonds having a yield premium over the stock at today's price by the end of 2011 are about the same as taking a long road trip and not seeing a Golden Arches somewhere near a highway exit. In short, the bonds look expensive, at least relative to the stock.
Since single data points don't tell a full story, I looked for other high-quality dividend growers with bonds that appear overvalued relative to the stock. The table below shows examples with each stock's dividend yield, an assumed dividend growth rate, bond maturity date and yield, and how many annual dividend hikes before the stock yield passes the bond yield. To be conservative, the assumed dividend growth rate is the smaller of the three-year dividend growth rate, the five-year dividend growth rate, or 10%.
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