5 Reasons to Buy the Dow's Top Stock (and 1 Reason Not to)
McDonald's (NYS: MCD) has been the best-performing stock in the Dow Jones Industrial Average (INDEX: ^DJI) over the past one- and five-year periods ending in 2011. Last year alone, the company delivered a total return of 35%.
Last week, the company reported that February sales came in lighter than expected due to weakness in Europe. Shares declined by 3%, which led many investors to wonder whether now is a good time to buy stock in this top performer. Below are five compelling reasons to pick up shares right now.
1. Outstanding performance. Despite the recent weakness in Europe, McDonald's is currently firing on all cylinders. In 2011, revenues increased by 12%, and operating income increased by 14%. Total comparable sales improved last year by 5.6%, which marked the eighth consecutive year of positive comp sales growth. Clearly, this is a company with a proven track record of outperformance. With a P/E of 18.3, McDonald's may appear a bit expensive, though it's considerably less pricey than Chipotle (NAS: CMG) and Yum! Brands (NYS: YUM) , which trade at P/Es of 59 and 25, respectively.
2. Attractive business model. McDonald's is known for having some of the best operating margins in the fast-food industry. This remarkable profitability is driven by its incredibly successful franchising model. In a recent interview, investing luminary Bill Ackman said he loves businesses like McDonald's, where you can charge a royalty on other people's sales. According to its most recent 10-K, 27,075 of the company's 33,510 restaurants were franchised or licensed. Revenues from the franchised restaurants include rent, royalties, and initial fees. Clearly, this model seems to be working very well for McDonald's and its shareholders.
3. Solid dividend yield. Currently, the company delivers a dividend yield of 2.9%, which compares nicely with Dow stalwarts Procter & Gamble and Coca-Cola, which have yields of 3.1% and 2.9%, respectively. The overall average for the Dow is 2.86%. Last year, McDonald's increased its quarterly cash dividend by 15%.
4. International growth opportunities. McDonald's is truly a global business, with 68% of its total revenue in 2011 coming from outside the United States. In the future, there is considerable growth potential in its Asia-Pacific/Middle East/Africa region, which was able to grow sales by 19% in 2011. In China alone, the company plans to open between 225 and 250 restaurants in 2012.
5. An enduring brand. As an 18-month-old, my daughter could already recognize the golden arches. Such is the power of this iconic brand. According to Interbrand, McDonald's is ranked No. 6 in its listing of the top 10 global brands for 2011, due to its reputation for consistency, quality, and consumer responsiveness.
As you can see, McDonald's looks like an excellent long-term buy from just about every angle you look at it. Here's one reason, however, why investors might take a pass:
Health and wellness trends may hurt McDonald's over the long term. Let's face it: This food is really, really bad for you. So far, the company has done an excellent job in addressing this public concern, but investors must consider whether McDonald's will be facing increasing regulation and public opposition over the longer term. A recent shareholder proposal raised concerns about McDonald's contributing to childhood obesity and diet-related diseases, such as diabetes, cancer, and cardiovascular disease. Will governments around the globe begin to intensify their oversight of fast food? Will increased education about the dangers of sodium, fat, and sugar ultimately curtail the company's growth?
One little pie won't hurt -- will it?
From a purely investing point of view, I suspect that the reasons for buying McDonald's shares far outweigh any concerns about long-term nutritional trends. There definitely will be more regulation in the future, but the company has shown itself to be very effective in dealing with opposition. Right now, it seems like burgers, nuggets, and fries are here to stay.
Personally, however, I'm somewhat unsure about this company, and I wouldn't invest in its stock. McDonald's is a well-operated business, but its most popular products are extremely unhealthy. In the restaurant space, I'm more comfortable investing in Chipotle, which appears to have a far more sustainable approach.
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At the time this article was published John Reeves owns shares in Procter & Gamble and Chipotle. You can follow him on Twitter where he goes by@TMFBane.The Motley Fool owns shares of Chipotle Mexican Grill and Coca-Cola.Motley Fool newsletter serviceshave recommended buying shares of Yum! Brands, Coca-Cola, McDonald's, Chipotle Mexican Grill, and Procter & Gamble. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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