Known all over the world by its distinguishable ‘golden arches’, McDonalds Corporation (NYSE: MCD) is the world’s largest restaurant chain. The US fast food giant first opened in 1940 as a single restaurant, however, today it now consists of nearly 38,000 restaurants serving 68 million customers each day in approximately 120 countries and territories.
More than 90% of McDonald’s restaurants throughout the world are owned and operated by independent franchisees. The company previously held stakes in various other food businesses like Chipotle, but today remains focused on driving the McDonald’s brand into a health-conscious and technologically sophisticated era.
With its first franchise formed in 1955, it took just ten years before McDonald’s went on to become a publicly-listed company in 1965. At the time, the IPO price was US$22.50 per share. Even after a dozen stock splits, and recent pressure after the departure of its CEO, the stock today trades at nearly US$200 per share. Yet while growth has been phenomenal to date, there are still a number of catalysts that could make today’s price a great buying opportunity.
Formidable competitive advantages driving comparable sales growth
Although headline results for McDonald’s fell short of market expectations in the third quarter, there are still promising signs on account of the company’s distinct competitive advantages. Few companies boast the same brand recognition as that of McDonald’s, while it also enjoys unmatched economies of scale from its global operations. Furthermore, the company has a proven history of customising its menu in each geography to cater to the preferences of local consumers.
With this, the company has seen 17 consecutive quarters of comparable global sales growth. During Q3, global same-store sales grew by 5.9%, well above the market’s expectation of 5.6%. Although comparable sales growth of 4.8% in the US was lower-than-expected, it remains robust and offset by increasing market share in regions like Russia, Portugal and Japan.
The composition of McDonald’s restaurant network has also helped drive margin growth. Franchised restaurants bring in lower revenue for the fast food chain, albeit margins are higher. Between 2015 and 2018, total revenue has declined by a compounded 6% per annum, but net operating profit after tax has actually increased by 9% compounded annual growth. With McDonald’s franchise network still short of its 95% target, the company has some leverage to drive further growth.
Innovation and technology are driving customer patronage
In recent years, McDonald’s has invested heavily in technology to drive engagement with its customers and incentivise them to return. The company’s digital community has become a strategic focus, growing to approximately 100 million users and showing no signs of slowing.
Promotional offers have been pushed out to customers to drive foot traffic, while in-store self-serve ordering technology is helping to realise efficiencies and upsize purchases. Technology has been a renewed focus for the company in 2019, with three acquisitions struck.
One of these is Dynamic Yield, which utilises AI machine-learning and automation to predict and recommend products to drive-thru customers. With the technology still being rolled out through the US, and expected to increase sales per customer, there is significant upside for revenue growth once this is fully installed across the US and if implemented abroad.
Elsewhere, delivery has grown into a key service for the company. Management expect the delivery channel to account for approximately US$4 billion or 4% of global sales. Three years ago this channel accounted for just US$1 billion. To date, the service is only offered in around 60% of McDonald’s restaurants, highlighting scalability that could become another catalyst.
Finally, McDonald’s has established a reputation as a constant menu innovator. Its value meals are targeted to budget-conscious consumers, while its signature range appeals to more affluent diners. The company has only just recently begun testing its own meatless, plant-based food products, which if launched, could reinvigorate comparable sales growth in the US.
An impeccable history of growing dividends
McDonald’s shares have a perfect record as one of the few stocks to continually increase dividends in every year. The company first began paying dividends to investors in 1976 and has raised that payout on each occasion thereafter.
Ahead of its third-quarter results, McDonald’s have declared a quarterly dividend of US$1.25 per share, which is up more than 7% from the dividend of US$1.16 per share paid in the quarter prior. This places the stock on an annual dividend yield of approximately 2.5% based on today’s trading price.
Conclusion: Unrivalled presence, innovation-focused and income growth
While the company’s share price has fallen in recent months due to concerns over competition, below-forecast results and the sudden departure of highly-regarded CEO Steve Easterbrook, these apprehensions appear overblown.
McDonald’s is recording sizeable growth in comparable sales, led by a strong performance in foreign markets. Efforts to realise a higher proportion of franchise-operated stores are driving margin growth, with further opportunities available. An emphasis on technology and menu innovation is setting the foundations for an increase in sales as the company improves its engagement with customers, better meets their needs, while also offering convenience.
With its dividend increasing 43 consecutive years, investors not only have capital growth prospects, but shareholders may also be afforded a sustainable and growing income stream.