This Dividend Champion Looks Tasty

Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

McDonald´s (NYSE: MCD) may not be the most exciting growth story in the markets today, but that´s precisely what makes it a smart bet for dividend investors looking for attractive returns while still being able to sleep smoothly at night. Slow and steady wins the race, and McDonald´s looks like a winning dividend champion.

Competitive strength

McDonald´s is the unquestionable leader in the global fast food industry; the company has more than 34,600 stores in 120 countries, including 28,000 franchises/affiliates and 6,600 company units. The firm has placed its stores in many of the most desirable locations in major world cities, and that´s an invaluable asset that provides a big advantage versus the competition.

No other brand in the industry enjoys the same recognition as McDonald´s, and the company´s scale advantages allow it to invest more than any of its peers in marketing and advertising. Besides, scale advantages mean more bargaining power when it comes to negotiating with suppliers, many of whom owe their existence to McDonald´s, and this allows the company to obtain food and other raw materials at relatively low and stable prices.

McDonald´s is not immune to the competition, and the company has been facing increased pressure lately. Chipotle Mexican Grill (NYSE: CMG) has delivered sales growth of more than 20% annually over the last five years, and the burrito maker is only the poster of the much successful fast casual category.

Fast casual restaurants maintain the same speed and experience of fast food chains, but they charge a few extra bucks for higher quality food, and consumers are embracing the concept. Chipotle´s “food with integrity” approach to Mexican cuisine is amazingly popular, and the company will most likely continue gaining market share versus traditional fast food chains like McDonald´s over the coming years.

Yum! Brands (NYSE: YUM) is another competitor to watch. The company is bigger than McDonald´s in China, a key market when it comes to long term growth. Both companies are taking a different approach to the country; while Yum has been expanding more aggressively and now makes more than 50% of total sales in China, McDonald´s has decided to be more selective and pay more attention to store location and profitability.

At the end of the day, China will provide plenty of room for both companies to profit handsomely, and the country is going through a huge transformation, so maybe McDonald´s is doing the right thing by being more careful and strategic about its expansion in the country. Still, Yum is the first mover in China, and the company has also been quite successful in the US with recent product innovations like its Taco Bell’s Doritos Locos tacos, so investors in McDonald´s need to monitor Yum Brands closely.

Wendy´s (NASDAQ: WEN) is in the midst of a turnaround, revamping its stores and investing in marketing to improve its brand image. The company is gaining some momentum with its “right price, right size” menu, and it seems to be moving in the right direction since same store sales increased by 1% in the last quarter. But Wendy´s is much smaller than McDonald´s with 6,000 stores in 23 countries, so the risk for the fast food giant seems to be contained as long as Wendy´s keeps focused on improving operations as opposed to expanding its store base.

By the numbers

The restaurant business has always been competitive, and that´s not going to change anytime soon. However, thanks to its rock solid competitive advantages and an efficient business model in which 80% of stores are operated by its franchise and affiliate system, the company leaves the competition in the dust when it comes to profitability.

McDonald´s has gross, operating and net margins that are way above those of its competitors, an unequivocal sign of business strength and management quality.

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The company reported positive sales figures on Monday; new menu offerings seem to be bearing their fruits since global comparable sales increased by 2.6% in May, better than the 1.9% increase expected by Wall Street analysts. This should come as comforting news for investors who have been concerned about lackluster sales data in previous months.

Dividend champions are a select group of companies that have been able to increase dividends over the last 25 consecutive years. McDonald´s is not only part of that exclusive club; the company has raised its payments each and every year since paying its first dividend in 1976, so it has accumulated 35 consecutive dividend increases, and counting.

McDonald´s is yielding 3.1% in dividends, and considering its underlying strength and rock solid track record, investors have good reason to expect growing distributions from this fast food powerhouse over the coming years.

Bottom line

McDonald´s enjoys remarkable competitive strength, and its efficient business model produces big fat profit margins for investors. Even if competitive pressures are tough and rising, the company has proven it´s ability to survive and thrive through all kinds of scenarios. This dividend champion is looking like a tasty choice for investors looking for big and growing dividend payments.

McDonald’s turned in a dismal year in 2012, underperforming the broader market by 25%. Looking ahead, can the Golden Arches reclaim its throne atop the restaurant industry, or will this unsettling trend continue? Our top analyst weighs in on McDonald's future in a recent premium report on the company. Click here now to find out whether a buying opportunity has emerged for this global juggernaut.

Andrés Cardenal has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and McDonald's. The Motley Fool owns shares of Chipotle Mexican Grill and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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