Revealed: The Secret of McDonald's Rich Heritage

McDonald's (NYSE: MCD  ) is one company that seems almost recession-proof. Even the economic slowdown has failed to take a meaningful bite out of its earnings. Let's delve into its secrets.

Numbers growing from strength to strength
Top-line and bottom-line numbers increased 14% to $7.2 billion and 8.6% to $1.5 billion, respectively, over the year-ago third quarter. The big drivers of McDonalds' growth have been strong same-store sales, up 5%, and its successful expansion in China.

Growth plans
McDonald's has been eyeing the emerging markets, Russia and China in particular. Its entry into Russia was like discovering a treasure trove. The country's burgeoning middle class has lots to offer to this fast-food giant. The company's global same-store sales rose 5.5% in October, heavily influenced by this emerging market growth.

In China, Mickey D's faces some heavy competition from 4,000 Yum! Brands' (NYSE: YUM  ) KFC and Pizza Hut outlets. Fellow American companies Starbucks (Nasdaq: SBUX  ) and Dunkin' Brands (Nasdaq: DNKN  ) are also foraying into these markets to take advantage of its massive population and rising income levels. However, McDonald's is taking the proverbial bull by the horns here. It has plans to add 700 outlets by 2013 to its already existing 1,300. In fact, McDonald's is getting into franchising with local players to understand and adapt to Chinese taste buds. It is also renovating stores for a better customer experience. But McDonald's has more to offer than a tasty menu.

Yummy returns
Few companies have a consistent history like McDonald's. It not only has an unfailing record of paying quarterly dividends, but it also raised dividends every year since its inception. It recently raised its quarterly dividend by 15%. Peers like Yum! Brands and Brinker International (NYSE: EAT  ) also announced dividend increases. But McDonald's dividend growth of 27.5% over the last five years is impressive.

What's the secret?
One large reason behind its success is actually pretty simple. McDonald's has the ability to see the world through others' eyes and identify their culture, needs, tastes, and preferences. The company keeps molding its menu across regions. These moves make the restaurants locally relevant. Be it the Big Mac in U.S., McAloo Tikki in India, or Samurai Pork Burger in Thailand, McDonald's always generates local interest. Prices are also kept reasonable to cater to a wide range of customers.

But is the stock cheap enough to include it in one's portfolio and be part of its success?

A comparative picture
I would like to take a look at the following two metrics to check if the stock is reasonably priced when compared to its peers.

Company

Trailing P/E

Forward P/E

McDonald's 18.5 16.5
Yum! Brands 21.0 17.12
Panera Bread (Nasdaq: PNRA  ) 27.7 23.4
Wendy's (NYSE: WEN  ) NM* 26.8

Source: S&P Capital IQ. *Negative earnings.

The restaurant industry in general is trading at a higher valuation than the rest of the market. It's mainly because food retailers are posting strong results in a tough economy. McDonald's overall is still cheaper than its peers. Paying these kinds of multiples for a stock like McDonald's is quite reasonable.

The Foolish bottom line
McDonald's leaves no opportunity to delight its customers and shareholders on the table. Let's not kid ourselves -- it may not provide the best of food and awesome chefs, but it is consistent with what it does, be it the rising revenues or the delicious dividend. It consistently thinks outside the box, experiments, fails, and learns from it. So you need not be the best to be the best. You simply need to be McDonald's.

If you want to find out more about McDonald's, as well as 12 other monster dividend stocks, simply click here for free access to the Motley Fool's special report, "13 High-Yielding Stocks to Buy Today."

Navneet Bajaj does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of Yum! Brands, Starbucks, and Panera Bread. Motley Fool newsletter services have recommended buying shares of Yum! Brands, McDonald's, Starbucks, and Panera Bread. 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.


Read/Post Comments (0) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1590660, ~/Articles/ArticleHandler.aspx, 11/23/2014 8:36:17 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement