In the fourth quarter of 2024, fast-food giant McDonald's (MCD +0.10%) raised its quarterly dividend from $1.67 per share to $1.77 per share. This is more consequential than just a 6% increase to its dividend. It also marked the 49th consecutive year that the company has both paid and increased its dividend.
If it raises its dividend again before the end of 2025, McDonald's will extend its streak to 50 years, placing it among the elite Dividend Kings.
A business doesn't just wake up one morning and find itself in such rarified air. To the contrary, paying a dividend in the first place denotes a degree of strong financial performance. Furthermore, progressively paying more on an annual basis over the course of decades suggests that the company is able to outcompete its rivals regardless of what's going on in the world, perhaps thanks to some competitive advantage.
In fact, I believe McDonald's does have competitive advantages. For starters, I think it's fair to say the company has a brand moat. Its restaurants might not be fine dining. But its golden arches are immediately recognizable, and consumers know exactly what to expect when they eat at any of its more than 43,000 restaurants worldwide.
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I believe the bigger competitive advantage for McDonald's is in its real estate holdings. Between land and buildings, the company's real estate is worth more than $40 billion. And in 2024, it made over $10 billion just from its franchisees paying rent. Being a landlord is a more predictable business than running a restaurant. And it's undoubtedly helped McDonald's as it sets its sights on becoming a Dividend King.
Here's the thing: Dividend Kings usually represent "old school" businesses. They tend to be the kind of things that don't go out of style, which is how they've achieved such long track records. They usually aren't known for dabbling in cutting-edge technology. But in this case, McDonald's intends to leverage artificial intelligence (AI) to its advantage in the coming years. Here's how.
How McDonald's aims to use AI
According to The Wall Street Journal, McDonald's is diving headfirst into AI. For a restaurant company such as this, AI can be employed in multiple ways.
For starters, McDonald's signed a deal with Google Cloud from Alphabet about 1.5 years ago that had an AI emphasis. McDonald's experimented with AI ordering in recent years, and the thought is that its partnership with Alphabet could allow it to finally roll it out at scale. If AI can take orders well, it could reduce labor costs and increase customer satisfaction.
Next, McDonald's has a huge loyalty program with 170 million people engaging with its app over the last 90 days, as of the end of 2024. These loyalty members accounted for a whopping $30 billion in sales in 2024, which was more than 20% of total sales for the year.
The idea is that McDonald's AI would be able to tailor a custom loyalty experience for members. It could combine past purchases with external data, such as local weather, to create offers to drive traffic to restaurants. This could even be instrumental in helping the company reach its goal of 250 million loyalty members by the end of 2027.
Finally, McDonald's and other restaurant companies are also considering how AI can be used to automate certain managerial processes, such as scheduling workers. This could redirect managers' time from menial tasks to improving the employee and customer experiences. But again, it hinges on whether the AI can do an adequate job.
In summary, McDonald's intends to use AI to improve things from a company, franchisee, and customer perspective. It's not guaranteed to work, but it's what the company is aiming for.
How it fits into the big picture
McDonald's mostly franchises its restaurants. While its restaurants had more than $130 billion in systemwide sales in 2024, the company itself only generated revenue of $26 billion. And to circle back to a previous point, more than $10 billion of this was solely thanks to rental payments on its properties from franchisees.
Viewed through this lens, McDonald's must prioritize keeping its franchisees happy and profitable -- it needs them to succeed so that they will keep paying the rent and be motivated to open new locations. McDonald's is hoping to surpass 50,000 restaurants by the end of 2027.
Efforts from McDonald's in AI reflect this mandate. McDonald's canceled previous AI attempts in its drive-thrus because order accuracy wasn't good enough, causing frustrations. Therefore, it's back to the drawing board with AI ordering in the drive-thru. Everything that the company is working on now will seek to improve the franchisee experience.
Time will tell if AI can make franchisees more profitable. If it can, expect rental payments to McDonald's to continue to grow, providing further financial ability to increase dividends in future years.
