McDonald’s Passes Go, Buy to Collect $200
Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As the Monopoly games rolls around for its 20th anniversary at McDonald’s (NYSE: MCD), investors are seeing that the company has solid control over the fast food game board. While nobody would argue that the Golden Arches represent premium properties like Boardwalk and Park Place, commanding the most properties can carry the day.
Against the backdrop of Wendy’s (NASDAQ: WEN) new pigtails on its logo and the continuing shift towards Chipotle Mexican Grill’s (NYSE: CMG) healthier options, McDonald’s continues to consistently march forward. That’s not to say the company is completely lacking in innovation – as shown by its recent decision to install Apple (NASDAQ: AAPL) iPad stations in select locations – but with stable sales and a dividend yield north of 3%, the stock is an attractive addition to your core portfolio.
While the competition in fast food is fairly vast in one sense, McDonald’s eclipses most of its competitors on most critical metrics. Compared to McDonald’s market capitalization of over $93 billion, Wendy’s at $1.6 billion and Chipotle just over $9 billion seem like they are in a different class. In the space, only Yum! Brands (NYSE: YUM), which operates Taco Bell and KFC, is even close with a market cap around $32 billion. Drilling down behind the total size of each company shows the same dominance in number of stores, global reach and most other metrics of consequence.
The real takeaway from this rather obvious disparity is that there are no longer any real apples-to-apples comparisons to make against McDonald’s. For investors, this should be a heartening reality because while the company is not likely to blow the proverbial doors off on the growth side, its total market security and 3.3% dividend yield make it an unflappable core holding not to be ignored.
Consistency is King
One of the central features of the McDonald’s culture is its unwavering consistency across the country. The reason that people who do not generally eat fast food stop at McDonald’s is that the Big Mac in Spokane will taste nearly identical to the Big Mac in Dallas or just off the Long Island Expressway. True, it is nearly impossible to drive more than 10 or 15 miles down a U.S. interstate without encountering the Golden Arches, but this too is a part of the company’s consistent delivery.
In contrast, most consumers agree that there are “good” Wendy’s locations and ones to avoid. At the good ones, the food may be better than a typical McDonald’s location, or it may vary from day to day. The same applies to Taco Bell and KFC. In fact, one of the reasons that Chipotle has been so successful is that even though the company makes a significant effort to source local fresh ingredients, the experience is consistently a pleasant one, with minimum quality standards that are appealing.
Wendy’s, at least, seems to be somewhat aware of its reputation and is taking steps to transform its image. The company recently announced that its logo is getting a makeover to go with its push to become known as a higher-end burger destination. Still, the Golden Arches stand as a beacon of where to go if you want to get exactly what you expect.
An additional side effect of this consistency is that McDonald's has been able to take forays into growth areas. Where the company has successfully rolled out McCafe, there is no equivalent at Wendy's, KFC or others. While its competitors are just trying to keep pace, McDonald's can tap new areas, giving it a significant strategic advantage worth noting.
Social Networking with a Side of Fries
In a recent release, McDonald’s announced that it will be installing a number of iPads at various locations around the country. The experiment has been relatively successful in Europe and was suggested by a U.S. franchise owner as a way to “stay relevant.” Critics of the plan point out that younger consumers are more likely to turn to individual smartphones for browsing while in the restaurant, leaving the primary users as seniors who may “clog” tables.
Ultimately, the specifics of the store traffic directly tied to the limited number of iPads will be of less importance than the message that their presence sends. Just as McDonald’s was able to evoke a more healthy and kid-friendly image by substituting apple slices for French fries in Happy Meals, this should give the company a technology-forward image that may drive business, regardless of the actual use the devices receive.
While McDonald’s may never control the most prestigious addresses on the monopoly board, the company understands that if you control all of the others, you will probably win the game anyway. By offering a solid income element and near-total market dominance on a variety of levels, McDonald’s exists almost without peers. Based on the combination of all these factors, the stock is a buy for your core portfolio.
Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Chipotle Mexican Grill and McDonald's. Motley Fool newsletter services recommend 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. If you have questions about this post or the Fool’s blog network, click here for information.