This Dividend Champion is a Buy Today

Few companies are as synonymous with their industry as McDonald’s (MCD) is with fast food. Since its founding decades ago, McDonald’s has revolutionized fast food and helped make it what it is today. Its brand and iconic golden arches are recognized in most places of the world.

There is no doubt that McDonald’s has been a timeless brand and remarkable business that has made many of its investors rich along the way, but that alone doesn’t automatically make it a great investment going forward. However, these three reasons emphasize why investors should be buying McDonald’s for the long haul.

1. Its dividend is growing rapidly
McDonald’s has been around for quite some time, so it’s unreasonable to expect its stock price to skyrocket in a month or year. However, its dividend is a major attraction for investors. Its current quarterly dividend is $1.67 per share, with a trailing-12-month yield of just under 2.2%. It’s far from the most lucrative dividend on the stock market, but it’s reliable and headed in the right direction.

An above-average dividend is nice, but a dividend that increases annually is better. McDonald’s has increased its annual dividend for 47 straight years, putting it on a clear path to becoming a Dividend King. The latest 10% increase to its dividend has capped off a decade during which the company has more than doubled its payout.

Investors shouldn’t be concerned about the stability of McDonald’s dividend, either. Its payout ratio, which measures the proportion of earnings paid in dividends, is 53%. That leaves plenty of money for McDonald’s to spend on expansion, marketing, and building out its technology capabilities (app, kiosk ordering, etc.).

2. It leans on localization to expand globally
Although McDonald’s got its start in San Bernardino, California, it has since grown to over 40,000 locations in more than 115 countries. McDonald’s has been doing well in its global strategy.

It’s relatively easy (I say that loosely) to operate successfully in your home country where you’re familiar with the workings. It’s not as easy to operate successfully internationally because each country has its own preferences, customs, and other unique factors. McDonald’s has addressed this through effective localization, in which specific locations are tailored to match local tastes.

For example, Japan has the Ebi Filet-O, India has the McSpicy Paneer, the Netherlands has the McKroket, and Malaysia has the Bubur Ayam McD. These are just a few examples, too; there are dozens of examples like this worldwide.

In the third quarter, McDonald’s internationally operated markets and international developmental licensed markets segments increased sales by 8.3% and 10.5% year over year, respectively. This outpaced its U.S. growth with 8.1%.

3. Its franchisee business model is helping its margins
Despite the tens of thousands of McDonald’s locations globally, most people would be surprised to know just how little of them McDonald’s operates: roughly 5%. The remaining restaurants are owned and operated by the franchisees.

In many cases, McDonald’s owns the real estate that franchisees must lease or rent. This allows the company to collect money from its franchisee fees as well as through leases and rents. Through the first three quarters of 2023, McDonald’s made just over $19 billion in revenue, with around $11.5 billion coming from franchised restaurants. Most of the revenue from franchised restaurants came from rental income.

The transition to a more franchisee-based model has increased McDonald’s gross profit margin because rental income is generally higher-margin than operating income from food. That puts the company in a position to keep being shareholder-friendly with share buybacks (over $2.2 billion worth through three quarters of 2023) and dividends, both of which provide long-term value for investors.

— Stefon Walters

Source: The Motley Fool