Fads come and go in the fast-food world, but people always seem to return to McDonald's (MCD -0.91%) when hunger strikes. The chain has led the industry for decades, through several tough recessions and constant competitive challenges.
Yet there's more to this business than just rock-solid growth. Shareholders' returns are bolstered by high profit margins, ample cash flow, and a dividend that's been expanding for decades. Here's why those factors make the stock an ideal one to have in your portfolio for the long term.
Success breeds success
One hallmark of a successful business is that it can gain market share in just about any selling environment. McDonald's latest earnings results show off this key ability.
Comparable-store sales were up 9% this past quarter, beating Chipotle and its 5% boost. McDonald's enjoyed some of its fastest growth in international markets like Europe, but the core U.S. division also grew 8%, even as consumers became more cautious in their spending.
The fast-food giant found success by improving fundamentals like food quality and speed of service. Consumers also loved its low-price menu options. "The macroeconomic environment is unfolding in line with our expectations... and we continued to deliver convenience and value for our customers," CEO Chris Kempczinski said in a late-October press release.
On the downside, McDonald's did note that customer traffic dipped into negative territory in recent months. Investors will be watching that metric for signs of a rebound ahead.
Profits and returns
If you liked McDonald's industry-leading profitability before, you'll love it today. Operating profit margin has jumped to 46% of sales in recent months, well above the 42% level that shareholders saw before the pandemic struck. Higher prices are helping, of course, but Mickey D's is getting additional benefits from its huge sales footprint, cost cuts, and steadily rising franchise and royalty fees.
MCD Operating Margin (TTM) data by YCharts
Cash flow is similarly strong, which helps explain why McDonald's added another 10% hike to its annual dividend payment. That payout has increased for 47 consecutive years, putting the chain on track to join the exclusive club of Dividend Kings in just a few years. Buying the dividend stock today will get you a meaty yield of 2.4%, which you can choose to automatically reinvest so that you accumulate more shares over time.
The price and value
McDonald's stock isn't especially cheap today, at 8 times annual sales. Both Chipotle and Restaurant Brands International, owner of Burger King and Tim Hortons, are available at a lower premium.
But these investments don't come with McDonald's stellar financial and operating strengths. More importantly, the businesses haven't proven, like McDonald's has, that they can change along with shifting consumer preferences to remain at the top of the industry.
There's no doubt that fast-food tastes will change many more times over the coming decades. And recessions will certainly depress earnings from time to time in the industry.
But owning this dividend stock means you don't have to anticipate these shifts or try to jump in and out of the fast-food niche. Simply hold McDonald's to gain exposure to growing demand for convenient meals and benefit from the rising dividend payment through the years.
