Please ensure Javascript is enabled for purposes of website accessibility

Here's a Chart Every McDonald's Investor Should See

By Demitri Kalogeropoulos – Nov 12, 2021 at 10:11AM

Key Points

  • Profitability is back to over 40% of sales after declining in 2020.
  • The chain is hoping to improve on that operating margin through cost cuts and more digital sales.
  • Shareholders should see strong returns by holding this industry leader.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The fast-food titan leads the industry with more than just its global reach.

There are many benefits to owning McDonald's (MCD -1.15%) stock. As a shareholder, you get exposure to the massive global fast-food industry through its leading brand. It's a business with a long track record for growth through many different selling environments.

There's also the bonus of an expanding dividend payment that's been growing for decades -- making McDonald's a Dividend Aristocrat -- and the stock currently yields 2.2%.

Yet arguably the best reason to own McDonald's is its financial strength, which shows up clearly in the chain's profitability when compared to its peers'.

A man carrying fast-food.

Image source: Getty Images.

The chart to see

The restaurant industry is famous for its generally low profit margins. Competition is fierce with both national and local rivals all fighting over the same pool of diners. It can be hard to consistently produce positive earnings, especially in inflationary times like we're seeing now with costs going up for wages and most ingredients.

MCD Operating Margin (TTM) Chart

Data by YCharts.

McDonald's stands out in the industry with leading profitability that is steadily rising. The burger giant routinely converts over 40% of its sales into operating profit. For context, its closest rival on this score is Restaurant Brands International, the company behind Burger King and Tim Hortons.

Getting better

The key factors beyond McDonald's success here include its huge sales footprint and its reliance on franchise fees, rent, and royalty income rather than food sales to produce earnings. The company crossed the 40% operating margin threshold about three years ago thanks to a refranchising initiative that helped lower the percentage of company-owned restaurants to around 7% of global locations as of this writing.

While McDonald's can't repeat that strategy, it is still finding ways to raise profitability. Just this past year, the chain saw big boosts from simplifying its menu and from relying more on digital ordering, drive-thru, and delivery volumes.

What about 2022?

More operating margin expansion would likely result in market-thumping returns for investors, assuming growth doesn't stall from its current solid pace. CEO Chris Kempczinski and his team have said the mid-40% range is a reasonable goal, and they believe the digital selling platform is the main factor that could push it higher over time.

Shareholders saw hints of this potential during the pandemic, when fast-food fans spent more per order and often opted for delivery.

Customer satisfaction is also key to McDonald's long-term gains, and the fact this figure is near record highs, according to management, suggests the chain isn't in danger of losing its leadership position in the industry.

But to have a chance at faster earnings growth, McDonald's needs to pair higher volumes with rising profitability. These two factors have been the foundation for strong shareholder returns over the past few decades, and they'll likely support the stock in 2022 and beyond.

Demitri Kalogeropoulos owns shares of Chipotle Mexican Grill and McDonald's. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. The Motley Fool recommends Domino's Pizza and Restaurant Brands International Inc. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.