Why Calories Are Better Than BTU’s for Your Retirement Portfolio
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Foolish blogger Robert Zimmerman and I have spent the past few months engaged in a bit of iron sharpening. In an effort to become more well-rounded investors, we’ve taken the time to look at both sides of an investment thesis. It’s a practice that’s helped us dig a little deeper and fully cover all our bases.
It’s also instilled a bit of friendly rivalry. While be both agree that Social Security won’t be our ticket to a comfortable retirement, we disagree over which stock will be our meal ticket. In Bob’s article he discusses the reasons why Exxon Mobil (NYSE: XOM) is the best company to fuel your retirement returns. I, on the other hand, think the better fuel for your retirement is found not in BTU’s but in the calories of McDonald's (NYSE: MCD).
Isn’t McDonald’s Just a Heart Attack Waiting to Happen?
While I respect Bob’s concern that the impact of the Affordable Care Act will be negative on McDonald’s bottom line, I think that he’s missing a key characteristic of the company’s business model. The ACA likely will ding margins, and according to the company’s CFO, that’s $10,000 to $30,000 in annual costs per location. However, with close to 90% of its 14,000 US locations franchised, the company isn’t as affected as you might think.
The franchising business is an incredibly high margin business for McDonald's, with operating margins clocking in north of 80% vs. 20% at company owned stores. Also, it’s often overlooked that McDonald's typically retains the rights to most of its buildings and properties, meaning the company acts not just as the franchisor but as the landlord. McDonald’s income isn’t as threatened as Bob might fear.
Another concern that investors might have is the concern that the McDonald's menu is one of the causes of obesity, and therefore healthcare costs are directly attributable to companies like McDonald's. Over the past few years, the company has fought back against these claims while also strengthening its healthier food options. The company is taking this threat seriously, and its ability to innovate and offer more healthy options will be a key driver of future sales.
While we think of the Golden Arches as being an American classic, the company’s future lies in its international operations. It’s true that the US business has saturated to the point of one restaurant for every 22,000 people, overseas it’s a much different story.
By the end of next year the company plans to have 2,000 stores open in China. That’s one store per 650,000 people. Top competitor Yum! Brands (NYSE: YUM) already has 4,000 KFC locations in China, and the company sees room for 20,000 stores. McDonald's, like Yum, is decades away from having the same penetration rate as those companies have domestically.
Despite the vast growth runways abroad, McDonald’s hasn’t always had runaway success. After years of struggling in Latin America, the company sold off that business into what’s now Arcos Dorados (NYSE: ARCO). Still, the company has retained high margin upside through royalties and fees, and that could be a model for its international operations if the company runs into similar problems overseas.
The Law of Large Numbers
I know what you might be thinking: Exxon is still a safer bet for your retirement portfolio. As Bob points out, we’ll always need the hydrocarbons that the company supplies. The company pays a great dividend and is selling at a dirt cheap valuation.
The thing is, unless you’re retiring soon you’ll still need some growth. For a person like me who is several decades away from retiring, I need more than what Exxon can offer. The company is just too big to make a big enough impact on my retirement. Further, as a commodity company, Exxon is completely dependent on the whims of the market to price its goods. McDonald's, on the other hand, has a valuable brand that has given the company pricing power to charge a premium for its products.
Foolish Bottom Line
Over the past year, shares of McDonald's have been knocked down to the point where the company is offering a tasty value to investors. This high-margin and extremely well run company is usually selling for a premium price north of 20 times earnings, but lately shares can be had for less than 17 times earnings. The company also pays a very juicy 3.5% dividend, which would compound very nicely in any retirement portfolio. While I certainly think energy has a place in your retirement plans, I’m taking the calories of McDonald’s over Exxon’s BTUs to fuel my retirement returns.
latimerburned owns shares of Arcos Dorados and has a Bull Call Spread on McDonald's. The Motley Fool owns shares of Arcos Dorados, McDonald's, and ExxonMobil. Motley Fool newsletter services recommend 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!