There’s no denying McDonald’s(NYSE: MCD) is the premier name of the fast-food industry. Not only is it the business’s biggest hamburger chain (as measured by the number of locales and revenue), but its operation has become the gold standard for how the restaurant franchise business should be managed. That’s why McDonald’s stock is such a reliable winner.
But a millionaire maker? That’s a different story. McDonald’s is still ultimately subject to the health of the fast-food business, which just isn’t a high-growth industry. It could take a long while for a modest investment in this stock to turn into a seven-figure sum.
Except, there’s a secret sauce helping out here that could do the job much faster than you might think.
But first things first.
You of course know the company. As was noted, with nearly 43,000 stores, McDonald’s is not only the biggest burger name in the restaurant business, but arguably the best-known and most nostalgic — a dynamic still working in the fast-food chain’s favor.
It may not quite be the company you think it is, however. Only about 5% of these locations are actually owned and operated by the parent company itself. The other 95% of its restaurants are franchises, managed by individuals and third parties looking to leverage the powerful brand name into a profit.
On the surface, that may seem like a trivial detail. All restaurant franchises agree to run their business in accordance with the franchisor’s requirements, after all, and purchase their supplies and ingredients from approved providers. In turn, the franchisor helps support and promote the brand.
There are a couple of distinct differences between McDonald’s and most other fast-food chains, though. First, McDonald’s capital requirements, royalties, fees, and operational expectations are collectively higher than the restaurant franchise industry’s average. And second, unlike almost all other fast-food franchises, McDonald’s franchisees don’t actually own the building from which they operate. They rent it from the parent, paying ever-rising market-based prices for this access.
That’s why McDonald’s is often described one of the world’s biggest real estate companies — it owns more than $40 billion worth of property and related equipment. And yes, this makes a world of difference to its shareholders.
Simply put, McDonald’s franchisees are bearing the brunt of the business risk here. The parent company’s royalty rates are between 4% and 5% of each locale’s gross sales, whether that store is profitable. Each location’s monthly rent payments are also a percentage of that store’s revenue, again without regard to that store’s profitability.
Connect the dots: Even if store operating costs soar, the McDonald’s corporation itself isn’t impacted much. Its revenue continues to flow and even grow, at least in step with inflation. The upshot for shareholders is decades’ worth of usually steady revenue and subsequent profit growth.
MCD Revenue (TTM) data by YCharts
The real star of the show, however, is McDonald’s dividend. Not only has the company paid one like clockwork since 1976, but it’s now raised its annual per-share dividend payment every year for the past 48 years. More to the point, it’s been able to afford this steady cadence of dividend growth. This streak isn’t apt to end anytime soon either, given McDonald’s sheer size and its mastery of the fast-food business.
But the bigger question remains: Could McDonald’s be a millionaire-maker stock?
Yes, it could, although there’s an important detail to inject into the discussion.
McDonald’s clearly isn’t a growth stock in the same vein as, say Nvidia or Amazon. The fast-food industry is already pretty well saturated, so most future growth will stem from mere population growth, even for the strongest name in the business. To this end, this company’s earnings before interest, taxes, depreciation, and amortization (EBITDA) has only grown an average of about 3.3% per year for the past several years.
But there’s a reason that McDonald’s stock’s price has improved by nearly 1,700% over the course of the past 30 years. That’s the other way the restaurant franchiser has added value: by repurchasing shares circulating in the open market. For the same time frame, this company has used some of its reliable profits to halve its outstanding share count from roughly 1.4 billion to just over 700 million, improving every per-share fiscal metric as a result.
This is only half of the secret millionaire-making sauce, though. The other half is using the growing dividends this company is dishing out to purchase more and more shares of its increasingly valuable stock. By reinvesting the dividends McDonald’s has been paying since then, a $30,000 investment made back in early 1994 would be worth $1 million today.
MCD Total Return Price data by YCharts
Obviously, past performance is no guarantee of future results. Indeed, it would be outright naive to pretend the environment and opportunity that was so fruitful for this company over the course of the past 30 years is the same environment it will be operating in for the next 30. Interested investors should pay particularly close to attention to how interested existing and prospective franchisees remain in this fast-food chain’s decreasingly attractive franchising terms.
Still, winners tend to remain winners if only due to what’s usually an enormous size that keeps competitors in check. If nothing else, McDonald’s at least brings that sort of muscle to the table.
The key for you is simply leaving it alone and letting time — and dividend reinvestment — do the bulk of the work.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Nvidia. The Motley Fool has a disclosure policy.
Could McDonald’s Be a Millionaire-Maker Stock? was originally published by The Motley Fool
