McDonalds: The Clown with an International Footprint

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

With 34,000 locations worldwide, the sun never sets on the Golden Arches' empire. Last year, McDonald's (NYSE: MCD) posted 5.6% growth, even with 40% of its sales coming from Europe, by adapting its  restaurants and menus to be as diverse as the people it serves. McDonald's flexibility, conservative management, and dedication to shareholders have made it a great place to invest. Just pull up and pay at the first window.

Business model
McDonald’s business model is worth copying.  While rival Wendy’s (NASDAQ: WEN) and McDonalds both have 80% of their stores owned by franchisees, fellow fast-food contender Burger King (NYSE: BKW) has 97% percent of its stores owned by its franchisees.  These companies all make most of their money off the royalties on a percentage of sales paid by the franchisees. 

But McDonalds has one additional stream of revenue that its competitors don’t: McDonalds also typically owns the land on which its stores are built, and collects rent from the franchisee.  This tends to be a more stable revenue stream than the commodities that go into making the burgers everybody loves. In reality, McDonald's is less of a restaurant, and more of a worldwide supply chain and REIT combination. 

McDonald’s revenue stream looks insulated from the ebbs and flows of the market, but how about its expenses? Siunce most of these stores are franchises, McDonalds stays somewhat protected from increasing labor costs in growth countries, and rising commodity costs worldwide.  This is not to say that higher grain or beef prices don’t put pressure on its business model -- but McDonald's franchisees are typically first to feel that squeeze.

Metrics and yield
Among the players in the burger wars, McDonalds looks like the best-greased machine.  The following graph compares Mickey D's and its biggest rivals on several key metrics that indicate how well a company is run.  Gross margin tells you how profitable a product lineup is, by calculating the difference between revenue and cost.  Profit margin gives you an idea how a company is managing its expenses, and how many dollars are flowing to net income.

<img src="/media/images/user_16122/mcdonalds-pe-comparison_large.jpg" />

McDonald's and Burger King both have healthy gross margins, while McDonalds has significantly higher profit margins.  Dividends have grown nearly 14% annually over the past five years, increasing 10% in 2012 to $3.08. At current prices, McDonald's is yielding 3.2%, while keeping its payout ratio near 50%. In addition to the dividend payout, since 2006, McDonald's has also used buybacks to reduce shares outstanding by 15%, from 1.2 billion to 1.02 billion.

Foolish bottom line
As you can see, McDonald's and Burger King both have healthy gross margins, while McDonald's has a significantly higher profit margin.

McDonald's continues to repurchase shares and increase its number of locations in high growth markets, currently only 22% of McDonald's sales come from growth Asia Pacific countries.  As Ronald McDonald's footprint expands overseas, we will see this company’s name brand remain as one of the most recognized in the world. This conservatively run American icon gives a portfolio some stability, as well as an opportunity for growth.  


wpatoka owns shares of McDonald's. The Motley Fool recommends Burger King Worldwide and McDonald's. The Motley Fool owns shares of 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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