McDonald's 101

 

Worldwide Invest Better Day 9/25/2012

This month at the Fool, we're stressing investing basics leading up to Worldwide Invest Better Day. Once investors have some of the basics covered, it's time to do some investment research.

I can't tell you what stocks you should buy, but I can go over the nuts and bolts of one of my core holdings. McDonald's (NYSE: MCD  ) is one of the more popular stocks in our CAPS community, with a five-star (out of five) rating. Of more than 6,000 active CAPScalls, nearly 5,800 of them -- including mine -- say the stock will outperform the S&P 500.

Here's a snapshot of the business.

Statement of operations McDonald's operates or franchises 33,735 restaurants in 119 countries.
Recent price $91.70
Market capitalization $92.5 billion
Forward P/E (next 12 months' EPS) 15.4
Dividend yield 3.05%

Sources: Latest 10-Q report and Yahoo! Finance.

More than 27,000 of the company's 33,735 restaurants are franchised. That means the majority of its profit comes from franchise fees, not directly from burger sales. Arcos Dorados (NYSE: ARCO  ) , the world's largest McDonald's franchisee, alone operates more than 1,800 restaurants in Latin America and paid McDonald's nearly $43 million in royalties last quarter.

Although it's a U.S.-based company, McDonald's has a worldwide footprint. Last quarter's revenue included euro, renminbi, yen, pesos, and other currencies from around the world. That does expose the company to exchange-rate risks, which can change from headwinds to tailwinds from quarter to quarter.

Geographic Area

Revenues
(Millions)

Percent of Total

United States $2,242 32.4%
Europe $2,741 39.6%
Asia, Pacific, Middle East, and Africa $1,548 22.4%
Other countries and corporate $385 5.6%
Total revenues $6,916  

Sources: Latest 10-Q report and author's calculations.

In addition to its strong brand, the dividend yield is a key reason I own this stock. At a little more than 3%, it tops the yields on most high-quality bonds. More important, the company has raised its dividend every year since it began paying one in 1976. With a payout ratio -- the portion of earnings paid as dividends -- of around 50% and projections for continued revenue and earnings growth, McDonald's has the ability to continue giving shareholders those nice annual raises.

Of course, McDonald's isn't the only company with a strong brand and a growing global business model. Your research process should include a look into competitors and companies with similar businesses to see whether they may be better candidates for your portfolio. Fellow fast-food operator Yum! Brands and coffee star Starbucks offer higher projected growth estimates, but they don't match the dividend story at McDonald's, and they trade at higher forward P/E multiples.

There's more to picking a stock, but learning the business profile, checking key valuation measures, tracking down where and how a company makes its money, and reviewing some competitors should always be part of the research process.

McDonald's has made The Motley Fool's list of "3 American Companies Set to Dominate the World." Want to know the other two stocks ready to conquer the globe -- and dominate your portfolio? Click here now for our free report.

Fool contributor Russ Krull owns shares of and collects dividends from McDonald's. You can follow his stock picks. The Motley Fool owns shares of Arcos Dorados Holdings, McDonald's, and Starbucks. Motley Fool newsletter services have recommended buying shares of Starbucks and McDonald's and writing covered calls on Starbucks. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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