These prominent billionaires just invested $700 million in 2 Dow Jones dividend stocks

Bill Ackman of Pershing Square Holdings and Andreas Halvorsen of Viking Global Investors are two highly regarded billionaire investment managers. In the second quarter, their companies 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 position worth $229 million NIKE (NKE 0.77%)while Viking Global disclosed a $478 million investment in McDonald’s (MCD 0.11%). Let’s explore why these billionaires like these stocks, even as both are sailing headwinds in the apparel and restaurant industries right now.

1. Nike

Ackman has a knack for spotting value where others don’t. Over the past 20 years, Pershing Square has delivered 16% annual returns, and its net worth has grown to $9 billion in recent years, according to Forbes.

Nike stock prices are down 53% from 2021 highs, prompting Ackman’s Pershing Square to start a new position in Q2. The top athletic apparel brand has been hit by weak consumer spending trends that have plagued several retailers over the past two years.

Nike is a large company that generates $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 associated with Nike’s lifestyle products. Its multi-sport performance products, its services still posted double-digit sales growth last quarter.

That suggests Nike has a clear path to improvement if it shifts its sales mix more toward performance products like running and basketball shoes, which have been the heart of the brand for 50 years.

Meanwhile, Nike keeps the profits to feed dividends to shareholders. Its net income grew 12% in fiscal 2024, and it paid out 38% of earnings as dividends. At its current quarterly payout of $0.37 per share, Nike’s forward dividend yield is 1.76% — its highest yield in ten years.

The stock still trades at a fair valuation, but its forward price-to-earnings (P/E) ratio is 26, which isn’t cheap. Still, it’s a reasonable price for a top brand that can still grow its earnings at double-digit rates over the long term.

The recent investment suggests that Ackman believes the Nike brand is undervalued by investors right now. Nike has a clear solution to return to growth by doubling down on innovation in its sports categories, and good execution against that strategy could send the stock back to its previous highs over the next couple of years.

2. McDonald’s

Viking Global Investors founding partner and CEO Andreas Halvorsen has a net worth of $7.2 billion, according to Forbes. The company manages a large US equity portfolio worth $26 billion at the end of the second quarter. One of his 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 spreads across multiple industries, it does not reflect anything negative about McDonald’s competitive position. This environment contributes to McDonald’s strength as a value-based brand.

The Golden Arches reported a 1% year-over-year decline in global comparable sales in Q2. Despite this poor performance, the stock has held up well this year and is close to hitting new highs. The reason for the stock’s performance in light of weak sales could explain why Viking Global likes it.

McDonald’s is more than just fast food. It is also a real estate company. It has a long history of owning the land on which its franchise restaurants are located, which provides profitable opportunities in leveraging these property values ​​to ultimately provide profitable growth for shareholders.

As of December 31, 2023, the company had $20 billion of buildings and land improvements on its balance sheet. It owned about 57% of the land and about 80% of the buildings used by its restaurants.

McDonald’s plans to increase its global restaurant base to 50,000 by 2027, which will obviously take advantage of its real estate expertise.

The combination of its franchise model, where 95 percent of its global restaurants are run by local owners, and its real estate strategy is why McDonald’s generated a high net profit margin of $8 billion on revenues of $25 billion. dollars in the last year.

While McDonald’s posted an 11% year-over-year drop in earnings last quarter, it pays out about half of its earnings in dividends. It currently pays a quarterly dividend of $1.67, which brings its forward yield to 2.3%. This dividend seems very safe given the manageable payouts relative to earnings and the profitable business strategy of the McDonald’s franchise.

The stock’s above-average dividend yield and attractive forward price/earnings of 24 make it a solid long-term buy.