One successful investment strategy is to find reliable companies with strong financials to buy and hold for a lifetime. That seems like a tall order, until you consider the competitive advantages of one particular American franchise. Let's take a closer look at why McDonald's (NYS: MCD) is a great stock for investors.
Taking a serving of profits
This five-star Motley Fool CAPS-rated favorite has enjoyed regular demand since the company first opened in 1955. During that time, it has evolved from an American fast-food chain into a brand recognized globally. Today, the world's largest restaurant service generates 66% of sales from overseas operations.
Franchised business model
Over the years, McDonald's has developed and mastered the franchise business model. Franchises now own over 80% of the company's restaurants worldwide.
That's good news for shareholders because instead of spending capital on its restaurants, McDonald's typically buys the land the franchise sits on and collects rent payments and service fees from franchisees. Rent and royalty income received from franchises contribute to the stellar health of McDonald's stock.
Competitors follow suit
Franchising accounts for 37% of McDonald's revenue. While competitor Yum! Brands (NYS: YUM) , which owns restaurant chains including KFC, Pizza Hut, Taco Bell, A&W, and Long John Silver's, only earns 12.6% of its revenue from franchising. Last year, fast-food rival Dunkin' Brands (NAS: DNKN) pulled in about 62% of its total revenue from franchising royalties and fees. However, neither of these companies has the same real estate ownership that McDonald's does, and thus misses out on valuable rent and depreciation as well.
In fact, some of the hottest franchises right now haven't been able to recreate the same real-estate revenue model McDonald's has. Panera (NAS: PNRA) , one of the most popular fast casual restaurants right now, typically rents space. Even McDonald's former creation, Chipotle Mexican Grill (NYS: CMG) , does not own much real estate.
McDonald's franchised business model continues to drive profitability for the company. In 2010, franchised margins improved to 82%, while company-operated margins improved to 19.6%. This year, franchise margins reached $1.9 billion, an increase of $133 million in constant currency for the third quarter.
Not to mention, McDonald's has increased its dividend every year since the company first issued one in 1976. If that isn't assurance enough, McDonald's CEO, James A. Skinner, has pledged to return all of the company's free cash flow after reinvestment back to shareholders via dividends and share buybacks.
As long as the franchise-owned outlets continue to generate spectacular free cash flow for McDonald's, this strong dividend stock will continue to create shareholder value.
McDonald's franchise business model makes it a strong company and a great stock for investors to own. They have a reliable cash stream and the low risk of McDonald's brand. If you're still not convinced that McDonald's is a great buy, let The Motley Fool's Watchlist tool help you follow the company and see how it does going forward. Click here to track McDonald's and other top-rated stocks for free, with My Watchlist.
At the time thisarticle was published Fool contributorTamara Rutterdoes not own shares of McDonald's or any companies mentioned in this column. Follow her onTwitter@TamaraRutter.The Motley Fool owns shares of Yum! Brands. Motley Fool newsletter services have recommended buying shares of McDonald's and Yum! Brands. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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