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A Growth Stock in Mature Stock's Clothing

By Motley Fool Staff - Nov 19, 2018 at 1:24PM

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What you didn’t know about the world’s largest burger chain.

In a show devoted to defensive stock investments in a deteriorating market, our Motley Fool Industry Focus: Consumer Goods podcast team discusses bellwether quick service giant McDonald's (MCD 2.46%). Recent innovations, from electronic ordering kiosks, to delivery options, and even healthier ingredients, are increasing the chain's bona fides with a younger generation.

In the following video, we explain why McDonald's is a solid choice to diversify your portfolio when stocks trade in the red for an extended period. We also touch on the company's surprising annual returns since the Great Recession.

A full transcript follows the video.

This video was recorded on Nov. 13, 2018.

Vincent Shen: Another company that I'd like to move on to, and I can't help but chuckle a little bit about this one, is McDonald's. The company has really roared back in recent years under the leadership of CEO Steve Easterbrook. Personally, I swear, all my friends will groan when McDonald's comes up. It's something they don't eat anymore, they complain it's unhealthy. But privately, one-on-one, I'll talk to my friends, and they'll admit to the occasional guilty pleasure drive-through for a Big Mac and French fries. And I feel the same way.

Given the success that we've seen with things like all-day breakfast, a better value menu, they've been investing in new technology like kiosk ordering, the refranchising efforts, I think the company has a lot of long-term irons in the fire to help it stand out even more in a weak market. You look at the most recent quarterly results, U.S. comps were up 2.4% while international markets grew 4.6%. Revenue is down from that refranchising effort that I mentioned, but the bottom line grew 17%. These franchising fees are far more stable, exactly what investors want in this kind of consumer staple business. The chain is renovating 1,000 locations every quarter. Delivery is now available 15,000 restaurants. Add to that the 2.5% dividend yield and a market-beating 7% gain for the stock year to date, and this really jumps out as an interesting option now for somebody who isn't looking to completely clear out their portfolio. They're looking for something to play defense, like we've talked about. What do you think?

Asit Sharma: I think McDonald's is a surprising source of growth in the fast food industry. Surprising because it's so large. One would think that the smaller rivals would take the available market share. But you're right, Vince. Since CEO Steve Easterbrook took over, the company's made a lot of rapid change. It's aligned itself with a more progressive eating out culture, which appeals to millennials. It's removed some harmful ingredients from its list. To point to the innovations that you mentioned, I'm especially interested in delivery. That's not just a U.S. story, but it's a global story. McDonald's has really ramped up its global sales. You mentioned 4.6% comparable sales internationally versus that slower U.S. growth. It used to be that McDonald's depended more on North America for expansion of revenue and margins. That equation has slowly flipped. Under Easterbrook, who really honed his chops in the U.K., I see that continuing.

I've always been interested in this stock. I think there are more guilty-pleasure-seekers, as you mentioned, than folks realize. I do think that the company has an in to the newer generation. Their app has been pretty successful. I know anecdotally -- take this with a grain of salt, maybe as much salt as you might find in a Big Mac, listeners -- anecdotally, my teen sons use that app, and we have always succumbed to guilty pleasures. I love McDonald's coffee. I can't say that we eat there all the time. But, I do think they've gotten into the millennial mindset, especially with the delivery.

Here's something that will interest readers. First of all, this company isn't found in the staples fund, but it's found in its sister fund, which is the Consumer Discretionary Select SPDR Fund, ticker XLY. It's supposedly a discretionary stock, but I want to make an argument here with this stock and one other stock that's coming up that we're going to talk about. In times of declining income, a stock like McDonald's is a staple stock. When you drop down from eating from a fancy restaurant to a fast-casual or quick-service restaurant, of course McDonald's will benefit. So, I always think of it as a staple more than a discretionary stock.

The wealth effect is very interesting to think about in relation to McDonald's, too. Vince brought up his college economics class. Here's one from mine. When the stock market declines, consumers feel less rich, and they tend to pull back their spending, which can then have a reinforcing effect on the economy, especially a consumption-based economy like we have here in the U.S. I think McDonald's can actually benefit if the stock market goes down or if the economy really does start to, indeed, slow. Either way, it will see some tailwinds.

Last thing I want to say about this company. If you went back to January 1st, 2008, and looked at the company's total return since then -- listeners, I'll pause again. What do you think it would average in the last several years? Almost 11 years now. McDonald's has returned 31% per year on an annualized total return basis since the Great Recession. I kid you not.

Shen: That's an unbelievable number. When you mentioned that to me before the show, I was blown away. That's the kind of number that you'd expect not from McDonalds, but maybe some of these high-flying tech companies.

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McDonald's Corporation
$252.96 (2.46%) $6.08

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