Why the Dow Served McDonald's

The Dow Jones Industrial Average (INDEX: ^DJI  ) contains 30 of the best-known and most successful companies in the world. They build the airplanes we ride on, serve us millions of hamburgers every day, and bring us the Internet on the devices they assemble.

But while their distinct identities are often usurped by inclusion on the index, each of the Dow's components offers investors unique opportunities and exposure. With this in mind, this article series provides a cursory update on each of the 30 stocks included on the storied index. Today, we're looking at McDonald's (NYSE: MCD  ) .

McDonald's has disappointed shareholders in 2012. As you can see in the chart below, with only three months left to go in the year, it has underperformed the Dow by more than 12 percentage points and trailed its closest competitor, YUM! Brands (NYSE: YUM  ) , by more than 21 percentage points. The question is: Why?

MCD Total Return Price data by YCharts.

On a fundamental level, McDonald's has struggled against unfavorable currency movements and erosion of margins. With respect to the former, for the six months ended June 30, the company reported a loss of $408 million, or $0.10 per share, "primarily due to the weakening of the Euro, along with most other currencies." With respect to the latter, for the first half of the year, net margins at company-operated stores fell by 50 basis points from 18.4% last year to 17.9% this year due to the rising costs of food, paper, and labor.

On a technical level, the decline seems related to its superior performance in the last few years. Since the middle of 2007, for example, McDonald's shares have returned an impressive 103% compared with the Dow's -1.2%. This is notably twice the rate of its earnings-per-share growth, though closely in line with the trajectory of its quarterly dividend payouts. It wouldn't be beyond reason, then, to conclude that large investors and fund managers have taken the opportunity to monetize gains.

Foolish bottom line
Make no mistake about it: McDonald's faces fundamental and technical hurdles, but along the way it has increased its reach around the world, growing both its top and bottom lines in impressive fashion. It's for this reason that the fast-food giant is one of three companies identified by our analysts in the free report "3 American Companies Set to Dominate the World." To learn the identity of the other two, simply click here now.

Fool contributor John Maxfield does not own shares in any of the companies mentioned above. The Motley Fool owns shares of McDonald's. Motley Fool newsletter services have recommended buying shares of McDonald's. The Motley Fool has a disclosure policy. We Fools may not 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.


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