The premise being considered today probably doesn't apply to anyone, since investors can buy as many (or as few) stocks as they want (or can afford). But as a hypothetical, limiting yourself to just one pick can serve as a powerful eye-opener to what you value as an investor. It also forces you to weigh all of a company's pros and cons to come up with a buy decision.
When I do this right now, my top all-weather stock ends up being fast-food chain pioneer McDonald's (MCD -0.91%). Here's why.
Not the fast-food chain you think it is
If you absolutely need massive returns, forget about it. McDonald's doesn't bring that to the table.
But if you can handle consistently above-average gains in addition to a decent, reliable dividend, Mickey D's is for you. The key to this consistency is the business model itself.
As a consumer, what you see is a chain of more than 40,000 restaurants. In reality, McDonald's is one of the world's biggest real estate companies. It just happens to be a landlord to franchisees that sell a lot of cheeseburgers.
Of last year's total top line of $23.2 billion, more than $9 billion of it consisted of rent payments collected from store operators; they don't own the building where they're operating. Another $5 billion of it was royalty payments made by these franchisees for the right to do business under the golden arches guidelines.
All told, only 5% of McDonald's restaurants are actually owned and operated by the company itself, and only about one-fourth of its revenue is driven by these company-owned restaurants.
And that's a big deal. Like any other landlord, the owner of this particular real estate can charge ever-rising rent, while the payments for the land and the buildings are fixed -- like any other mortgage (if there's a payment at all). That means ever-widening profit margins.
In a similar vein, royalties are typically paid as a fixed percentage of a restaurant's sales. Rising inflation inherently drives these payments higher, and these payments must be made regardless of how much or how little profit margin a franchisee/operator produces.
The end result? Surprisingly consistent revenue and profit growth.
MCD Revenue (TTM) data by YCharts. EPS = earnings per share; TTM = trailing 12 months.
In case you're wondering, the revenue lull that started back in 2014 was by design. That's when the parent company began selling many of its own stores to franchisees. Notice how net income and per-share profit growth remain mostly unfazed, suggesting franchise fees and royalties drive higher-margin revenue than selling burgers directly to consumers.
Why franchisees are still lovin' the agreement
On the surface, it's seemingly unfair: Franchisees carry the bulk of any business risk, yet never truly own their operation. Look beneath the surface, though, and the deal is fair enough. For instance, McDonald's is one of the world's best-known and best-marketed brand names. According to a recent study commissioned by Vistaprint's Promotique, McDonald's is the world's second-most-recognizable brand (behind Apple) largely thanks to its golden arches logo.
The parent company's strict enforcement of exacting standards also plays a part in its consistent success. There's business value in consumers knowing their experience at one McDonald's restaurant will roughly be the same affordable experience in any other McDonald's. McDonald's also enjoys enough scale (and the resulting leverage) to negotiate lower costs with its suppliers on behalf of franchisees.
Then there's the less-measurable aspect of the company's model: the balance between value and quality. There's always a market for its price points and products, regardless of the economy. That's yet another big reason McDonald's bottom line and cash flow are so consistent, in turn supporting a reliable dividend.
MCD EPS diluted (quarterly), data by YCharts.
And that dividend has been paid every quarter since 1976 and raised every year since then. The current yield stands at a respectable 2.1%.
McDonald's serves up what really matters to investors
Is McDonald's an exciting stock pick? Nope, not even close. But entertainment isn't the goal if you're hypothetically limited to just one pick -- or looking for your very first long-term pick. The goal here is reliable growth in any and all situations. This company brings that to the table, in abundance.
