5 Reasons to Buy the Dow's Top Stock (and 1 Reason Not to)

McDonald's (NYSE: MCD  ) has been the best-performing stock in the Dow Jones Industrial Average (INDEX: ^DJI  ) over the past one- and five-year periods ending in 2011. Last year alone, the company delivered a total return of 35%.

Last week, the company reported that February sales came in lighter than expected due to weakness in Europe. Shares declined by 3%, which led many investors to wonder whether now is a good time to buy stock in this top performer. Below are five compelling reasons to pick up shares right now.

1. Outstanding performance. Despite the recent weakness in Europe, McDonald's is currently firing on all cylinders. In 2011, revenues increased by 12%, and operating income increased by 14%. Total comparable sales improved last year by 5.6%, which marked the eighth consecutive year of positive comp sales growth. Clearly, this is a company with a proven track record of outperformance. With a P/E of 18.3, McDonald's may appear a bit expensive, though it's considerably less pricey than Chipotle (Nasdaq: CMG  ) and Yum! Brands (NYSE: YUM  ) , which trade at P/Es of 59 and 25, respectively.

2. Attractive business model. McDonald's is known for having some of the best operating margins in the fast-food industry. This remarkable profitability is driven by its incredibly successful franchising model. In a recent interview, investing luminary Bill Ackman said he loves businesses like McDonald's, where you can charge a royalty on other people's sales. According to its most recent 10-K, 27,075 of the company's 33,510 restaurants were franchised or licensed. Revenues from the franchised restaurants include rent, royalties, and initial fees. Clearly, this model seems to be working very well for McDonald's and its shareholders.

3. Solid dividend yield. Currently, the company delivers a dividend yield of 2.9%, which compares nicely with Dow stalwarts Procter & Gamble and Coca-Cola, which have yields of 3.1% and 2.9%, respectively. The overall average for the Dow is 2.86%. Last year, McDonald's increased its quarterly cash dividend by 15%.

4. International growth opportunities. McDonald's is truly a global business, with 68% of its total revenue in 2011 coming from outside the United States. In the future, there is considerable growth potential in its Asia-Pacific/Middle East/Africa region, which was able to grow sales by 19% in 2011. In China alone, the company plans to open between 225 and 250 restaurants in 2012.

5. An enduring brand. As an 18-month-old, my daughter could already recognize the golden arches. Such is the power of this iconic brand. According to Interbrand, McDonald's is ranked No. 6 in its listing of the top 10 global brands for 2011, due to its reputation for consistency, quality, and consumer responsiveness.

As you can see, McDonald's looks like an excellent long-term buy from just about every angle you look at it. Here's one reason, however, why investors might take a pass:

Health and wellness trends may hurt McDonald's over the long term. Let's face it: This food is really, really bad for you. So far, the company has done an excellent job in addressing this public concern, but investors must consider whether McDonald's will be facing increasing regulation and public opposition over the longer term. A recent shareholder proposal raised concerns about McDonald's contributing to childhood obesity and diet-related diseases, such as diabetes, cancer, and cardiovascular disease. Will governments around the globe begin to intensify their oversight of fast food? Will increased education about the dangers of sodium, fat, and sugar ultimately curtail the company's growth?

One little pie won't hurt -- will it?
From a purely investing point of view, I suspect that the reasons for buying McDonald's shares far outweigh any concerns about long-term nutritional trends. There definitely will be more regulation in the future, but the company has shown itself to be very effective in dealing with opposition. Right now, it seems like burgers, nuggets, and fries are here to stay.

Personally, however, I'm somewhat unsure about this company, and I wouldn't invest in its stock. McDonald's is a well-operated business, but its most popular products are extremely unhealthy. In the restaurant space, I'm more comfortable investing in Chipotle, which appears to have a far more sustainable approach.

McDonald's may or may not be for you, but if you're interested in learning more about additional dividend-paying stocks, then you should take a look at our latest free report. Just click here to get 11 additional dividend stock ideas.

John Reeves owns shares in Procter & Gamble and Chipotle. You can follow him on Twitter where he goes by @TMFBane.

The Motley Fool owns shares of Chipotle Mexican Grill and Coca-Cola. Motley Fool newsletter services have recommended buying shares of Yum! Brands, Coca-Cola, McDonald's, Chipotle Mexican Grill, and Procter & Gamble. 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 (6) | Recommend This Article (20)

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.

  • Report this Comment On March 12, 2012, at 3:17 PM, shareholdersRus wrote:

    Just checking Mr. Reeves. You're more comfortable buying Chipotle at P/E 59 and zero dividend yield than MCD at P/E 18 and a 2.9% yield?

    Do growth prospects for Chipotle really support this? How? Does management of Chipotle have a proven track record over a long term to even approach MCD legend?

    Give me my Big Mac and Sausage Biscuit with Egg any time.

    I'll pass on the pico de gallo and the fancy tacos. I go Taco Bell for "fancy enough" tacos. YUM. Oh, but as far as investments go, it's MCD all the way. I'm a true novice, but core holdings - and most true "investments" - don't typically sell for 59 times earnings, do they?

  • Report this Comment On March 12, 2012, at 3:41 PM, BlakeWellington wrote:

    Your one risk, that McDonald's food is "really really bad for you" is a non-factor from an investor's point of view. It is a classic mistake to view McDonalds as just a junk food chain. Try to view them for what they really are: a food distribution and delivery system. Right now, the public demands (and the government allows) McDonalds to deliver high calorie, low nutrition foods. And McDonald's delivers the goods! They're very, very good at it.

    But if the circumstances change, say, for example, if the public demands nutritional, natural foods, you can bet your bottom dollar that MCD will deliver!

    McDonald's is uniquely positioned to deliver whatever food the market demands. They have a massive infrastructure to pump out whatever is the latest food fad or the old standbys such as burgers and fries.

    So, why won't you buy them again?

  • Report this Comment On March 12, 2012, at 3:50 PM, Tedishor wrote:

    I would not like to think that Mr. Reeves is trying to create demand for a stock he owns. But when he writes that McDonald's food is "really, really bad for you" it makes me wonder whether Mr. Reeves had stepped into a McDonald's in the last ten years. What is "extremely unhealthy" with McDonald's salads, yogurt and fruit, and other new things? Should the food police suppress hamburgers and fries not only at McDonald's, but in private homes because the food police does not approve? If not, what is the difference between having the "really,really bad" food at home and going to buy it?

  • Report this Comment On March 12, 2012, at 5:01 PM, TMFBane wrote:

    Great comments, everyone! I really appreciate your thoughts on this.

    For the record, I am SO not the food police. I go to McDonald's from time-to-time -- my children love the place in fact. From everything I've read, however, it seems like the core (burgers, nuggetts, and fries) is quite unhealthy. I think that's an important issue that I've been trying to be more mindful of. The Fool, for example, has become more healthy in recent months, and that's something I really appreciate.

    As for Chipotle, I've owned shares for several years now. People have been telling me it's too expensive for a while now, but I'm in for the long-term.

  • Report this Comment On March 12, 2012, at 9:17 PM, jdwelch62 wrote:

    Couple more points: On the "really, really bad food" front, McDonald's isn't the only fast food chain out there. I just had Carl's Jr for lunch today (drove further to get to it than my neighborhood McDonalds, but I own MCD stock... LOL), driving past Burger King, Wendy's and Taco Bell to get there. You can't pin all the obiesity and diet-related problems of our modern society just on McDonald's...

    Secondly, one big plus for MCD that you left off your list is that they're essentially (or at least partially) a real estate trust. They own most of the land, and more of the buildings, that their franchisees rent from them. You brushed the subject in your "Attractive Business Model" bullet, but I think it's worth calling out on its own. Despite recent problems with the real estate market, real estate does and will go up in value over time, so that's a huge asset base.

    However, that does bring me to a question I've had about MCD playing out in China: Will the Chinese govt allow them to be landowners and such in the Middle Kingdom? I can't say for certain, but I'm thinking not...

    But on the whole, I think MCD is a solid play, which is why I added it to my portfolio...

    Fool on!... :-)

  • Report this Comment On March 12, 2012, at 9:22 PM, jdwelch62 wrote:

    BTW, Point-Meets-Counterpoint:

    http://www.fool.com/investing/general/2012/03/12/why-mcdonal...

    And all in the same day!

    :-)

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