The fast food giant McDonald’s Corporation (NYSE: MCD) saw excellent global comparable sales in the second quarter, up nearly 10% and growth across all segments (US segment up 3.7%, International Operating Markets segment up 13% and the International Development Licensed Markets segment increased by 16%). Sales in the six major markets exceeded $6 billion in 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).
Read more: Should you buy dividend stocks during inflation?
Today, Chicago-based McDonald’s Corporation operates and franchises restaurants worldwide. It is famous for its hamburgers and cheeseburgers, chicken nuggets, fries, milkshakes, desserts, sundaes, soft serve cones, sodas, coffee, bagel and cookie sandwiches, breakfast burritos, hot cakes 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 burgers and began franchising their restaurant, offering burgers, shakes and fries. Ray Kroc became the franchise agent for the McDonald brothers 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 more than 36,000 restaurants in more than 100 countries.
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 ), the Chicken McNuggets. (in 1983) and the McFlurry dessert (in 1995). The Ronald McDonald House was established in 1974 and its global advertising campaign, “I’m lovin’ it” was launched in 2003. In 2020, McDonald’s opened its first net zero design restaurant at the Walt Disney World Resort.
McDonald’s had its initial public offering (IPO) on April 21, 1965. One share cost investors $22.50 and the stock went for $30 per share on the first day of trading. Let’s say you bought 100 shares the day it went public. By March 1999, you would have had over 74,000 shares due to 12 stock splits that cumulatively increased the number of shares by a factor of 729. You would have had nearly $16,000,000 on hand. In 2022, the company is worth about $185.17 billion.
Why you should consider investing in McDonald’s
Let’s take a look at why you might want to consider investing in McDonald’s.
- Earnings: McDonald’s raised its pre-pandemic revenue in 2021 after earnings fell in 2020. Indeed, revenue rose to $23.2 billion in 2021 from $21.3 billion in 2019. Global comparable sales increased 9.7% across all segments and the US alone increased by 37%. , outperforming the S&P 500 benchmarks.
- Universal appeal even during inflation: While this seems like a simplistic reason to invest, given all the fundamentals you should analyze before investing, the simple truth is that even in times of inflation, people still need to eat. Fortunately, McDonald’s has been branded as the “cheap” place to get a tasty meal. Ultimately, consumer staples tend to hold up well during recessions.
- Price increase: Restaurant chains, including McDonald’s, have raised their menu prices as inflation rises because their own prices are rising. Fortunately, McDonald’s customers have been responding well to the price increase, probably because McDonald’s has gradually increased them.
- Continued Success: The company seems like it can’t go wrong. It has developed a wide range of responses to develop consumer trust: consistency, efficient processes, innovation, adapting to consumer concerns and paying attention to what customers want (like requesting breakfasts throughout the day) have always been McDonald’s brands.
Why you might not want to invest in McDonald’s
Now, let’s take a closer look at the reasons why you might want to avoid investing in McDonald’s.
- Firm competence: There’s no doubt that McDonald’s faces competition from other fast food brands, including Burger King, Wendy’s, Taco Bell and KFC. Competitors such as Chipotle Mexican Grill and other types of fast-casual food have also developed their own niche. You may find better bang for your buck elsewhere. Despite these competitors, McDonald’s has blown most of the water out of it, so carefully compare its performance against McDonald’s before investing.
- 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 thanks to management taking advantage of liquidity and low interest rates. However, due to rising interest rate levels, the management of McDonald’s Corporation will have to deal with these challenges.
- Currency impacts and slower sales: In China, due to the COVID-19 lockdown, there have been bottom line challenges with sales falling amid strong sales in other countries. Still, these are minor concerns compared to the company’s far more successful overall results.
Learn more: How to build a great portfolio of dividend stocks
Consider your portfolio as a whole before investing in McDonald’s
There are many great companies to consider investing in, and McDonald’s Corporation is one that has stood the test of time. Sales growth and earnings that surprised analysts beating competitors are three good features that McDonalds has going for it right now.
Before you invest, analyze McDonald’s Corporation’s earnings, balance sheet, fundamentals and more. Buying McDonald’s stock for dividends means you can hold the stock for the long term, especially if you want to live off the dividends in retirement.
If McDonald’s Corporation is not your best match, consider investing in other well-established companies because you can usually depend on them to provide reliable dividend payments, especially Dividend Kings vs Aristocrats.
Still not sure what small part of the company you want to buy? Take a look at 11 High Yield Dividend Stocks.