The fast food behemoth McDonald's Corporation (NYSE: MCD) has seen excellent global comparable sales in Q2, an increase of nearly 10% and growth across all segments (the U.S. segment increased 3.7%, the International Operated Markets segment increased 13% and the International Developmental Licensed Markets segment increased 16%). Sales in the top six markets exceeded $6 billion for the quarter.
Let's take a closer look at McDonald's as a company, why you should consider investing in McDonald's (and why you might not want to invest in the fast food giant).
Learn more: Should You Buy Dividend Stocks During Inflation?
Today, McDonald's Corporation, headquartered in Chicago, operates and franchises restaurants across the world. It is famous for its hamburgers and cheeseburgers, chicken nuggets, fries, shakes, desserts, sundaes, soft serve cones, soft drinks, coffee, biscuit and bagel sandwiches, breakfast burritos, hotcakes and other specialties.
You may be intimately aware of its ubiquitous name and brand, but what about its history? Let's take a quick look.
After Dick and Mac McDonald failed in the movie business, they realized their ability to operate drive-in restaurants. In 1948, they sold 15-cent hamburgers and began franchising their restaurant, offering hamburgers, shakes and fries. Ray Kroc became the McDonald brothers' franchise agent and in 1955, opened the first McDonald’s east of the Mississippi River. By 1967, McDonald's restaurants had opened in Canada and Puerto Rico and now has over 36,000 restaurants in over 100 nations.
Along the way, the restaurant created the Filet-O-Fish sandwich (in 1965), the Big Mac (in 1968), the Quarter Pounder and Quarter Pounder with Cheese (in 1973), the Egg McMuffin (in 1975), Chicken McNuggets (in 1983) and McFlurry desserts (in 1995). The Ronald McDonald House was created in 1974 and its global ad campaign, “i’m lovin’ it” launched in 2003. In 2020, McDonald’s opened its first net zero-designed restaurant at Walt Disney World Resort.
McDonald's had its initial public offering (IPO) on April 21, 1965. One share of stock cost investors $22.50 and the stock cost $30 per share on the very first trading day. Let's say that you had bought 100 shares on the day it had its IPO. By March 1999, you would have owned over 74,000 shares due to 12 stock splits that cumulatively expanded share counts by a factor of 729. You would have had almost $16,000,000 in hand. In 2022, the company is worth around $185.17 billion.
Why You Should Consider Investing in McDonald's
Let's take a look at why you may want to consider investing in McDonald's.
- Earnings: McDonald's grew its revenue from before the pandemic in 2021 after its earnings fell in 2020. In fact, revenue totaled $23.2 billion in 2021 from $21.3 billion in 2019. Global comparable sales increased 9.7% across all segments and the U.S. alone increased 3.7%, beating S&P 500 benchmarks.
- Universal appeal even during inflation: While it seems like a simplistic reason to invest, considering all the fundamentals you should analyze before you invest, the simple truth is that even during inflationary times, people still need to eat. Fortunately, McDonald's has branded itself as the "cheap" place to get a tasty meal. Ultimately, consumer staples typically hold up well during recessions.
- Increasing prices: Restaurant chains, including McDonald's, have been raising their menu prices as inflation soars because their own prices are rising. Luckily, McDonald's customers have been responding well to increasing prices, likely because McDonald's has slowly inched them higher.
- Continued success: The company seemingly can't go wrong. It has developed a wide number of responses to develop consumer confidence: consistency, efficient processes, innovation, adaptation to consumer concerns and catering to what customers want (such as the request for all-day breakfasts) have always been the trademarks of McDonald's.
Why You May Want to Steer Clear of Investing in McDonald's
Now, let's take a close look at reasons why you may want to avoid investing in McDonald's.
- Staunch competition: There's no question that McDonald's faces competition from other fast food brands, such as Burger King, Wendy's, Taco Bell and KFC. Competitors like Chipotle Mexican Grill and other types of fast-casual dining have developed their own niche as well. You may find a better bang for your buck elsewhere. Despite these competitors, McDonald's has blasted most of them out of the water, so carefully compare their performance to McDonald's before you invest.
- Weak dividend yield: A dividend yield of 2.16% reflects a percentage more in line with a high growth company, not a mature company like McDonald's Corporation. You may want to look for a dividend yield more in line with market averages.
- Debt: Long-term debt has grown due to management taking advantage of liquidity and low interest rates. However, due to rising interest rate levels, McDonald's Corporation management will have to handle these challenges.
- Currency impacts and slower sales: In China, due to COVID-19 lockdowns, bottom-line challenges have shown up with downed sales amid strong sales in other countries. Even so, these are smaller concerns compared to the company's much more successful overall bottom line.
Learn more: How to Build a Large Dividend Stock Portfolio
Consider Your Portfolio as a Whole Before Investing in McDonald's
There are a lot of great companies to consider investing in, and McDonald's Corporation is one that has stood the test of time. Increasing sales, and earnings that surprised analysts outperforming competitors are three good characteristics McDonalds is delivering right now.
Before you invest, analyze McDonald's Corporation's full bottom line, balance sheet, fundamentals and more. Purchasing shares of McDonald's stock for dividends means that you may hold on to the stock for the long term, particularly if you might want to live off the dividends in retirement.
If McDonald's Corporation isn't your best match, consider investing in other well-established companies because you can typically depend on them to offer reliable dividend payments, particularly the Dividend Kings vs. Aristocrats.
Still not sure which small portion of a company you want to purchase? Take a look at 11 Dividend Stocks with High Yields.