McDonald’s (NYSE: MCD) is a US$157 billion fast-food giant. You’d probably are familiar with the company.
This is one of the largest fast-food chains in the world, with around 39,000 restaurants in more than 100 countries worldwide.
And its famous golden arches, in my opinion, makes it one of the most recognized brands, alongside Apple or Starbucks.
You see, McDonald’s products are addictive. It sells its famous cheeseburger, fries and ice-cream, alongside other peripheral items. These contain lots of processed ingredients which are high in sugar and salt content. This keeps people coming back for more.
But what’s more important here is McDonald’s runs its operations like clockwork. The way the food is prepared, the ingredients used, every staff’s responsibilities are all precisely measures and planned according to a set of instructions.
The operation becomes very efficient. And this allows orders and payment to be made quickly.
Now, because they can sell their burgers in a precise manner, McDonald’s actually franchises their business. And it benefits the company in a huge way.
So what happens is the restaurant owners pays for a McDonald’s franchise, then puts up the entire capital to run the operations. The only thing McDonald’s needs to do is give the restaurant its logo and operational expertise at a small cost of running the restaurant.
Out of the 39,000 restaurants, it has around 36,000 franchises located across its more than 100 countries.
This allows McDonald’s to generate massive free cash flow with little capital costs needed. Between 2010 and 2019, it gushed free cash flow of around US$4.4 billion. It generates so much free cash flow that in 2019, it hit roughly 27% of its total sales.
As far as I’m concerned, McDonald’s wasn’t a victim of the COVID-19 pandemic.
You see, many of its restaurants have “drive-thru”. And this enables customers to quickly order their food without ever leaving their cars. It’s also much safer this way to buy food during the pandemic.
This makes McDonald’s more resilient than any other F&B businesses.
During its latest third-quarter financial results, its “same-store-sales” grew about 4.6% year on year globally. Including new stores and franchises, its total sales were down marginally by 2% to US$5.4 billion. Its cost control during the pandemic was good. Net earnings during the same period grew 11% to US$1.8 billion.
As mentioned, because it generates so much free cash flow, it’s able to reward shareholders very well. In fact, its dividends per share grew from US$2.26 per share in 2010 to US$4.73 per share in 2019.
Even during the pandemic, it continued to raise its dividends. It recently announced a quarterly dividend of US$1.29 per share, which was higher than US$1.25 per share in the previous quarter. This will put McDonald’s total dividends per share at US$5.04 for 2020.
With a modest dividend payout ratio of only 60%. McDonald’s uses its excess cash to buy back shares. It bought back so many shares that it reduces its shareholders’ equity to a negative figure, On the contrary, this is a dividend investor’s dream.
Over the past three years, the company bought back close to US$15 billion worth of shares, creating more value on each unit of share an investor owns.
McDonald’s Growth Lever Still Strong
And even during the pandemic, the company continues to grow.
In its third-quarter results, it announced it will open up another 1,300 restaurants globally, and because it franchises out its business, it doesn’t have to worry about putting up much capital. Most of the costs will be absorbed by the franchisee.
One key risk I have is the intense competition within the F&B industry. It’s no secret that restaurant businesses are cutthroat because of the high labour and rental costs. And many of them compete with each other on price.
But so far, McDonald’s franchise model and common “drive-thru” windows allow it to separate itself from the competition, and save a huge part of its rental costs.
This is also what makes it a very capital-efficient business.
It’s US$300 million acquisition in a technology company called Dynamic Yield is a strategic move. McDonald’s plans to improve customer experience by giving customers digital “drive-thru” menu displays, self-order kiosks and including their Global Mobile App.
So far, its shares have rebounded strongly since the major correction in April 2020. It was up 53% from its mid-April lows. On a longer-term basis, its stock almost doubled since 2015, which is a testament of its strong business model.
Source: Yahoo Finance
McDonald’s business has come a long way since its founding in 1940.
While many recognize its famous golden arches, its products and clockwork-like operations make it one of the most successful and sustainable businesses.
Willie Keng, CFA is the Founder of Dividend Titan (www.dividendtitan.com) -- a financial research publication for investors looking to grow their wealth for retirement. A former research analyst for top private banks, Willie also runs his own consulting firm. He advises investment companies on their businesses. Some of his clients include asset managers and family offices. Willie has a deep passion for helping everyday investors take control of their financial future. And has spent over 10,000 hours researching, analyzing and recommending investment ideas.