Generally speaking, the restaurant business isn't a great one to be in. It's not a cheap business to get into, the failure rate is relatively high, and running the ones that do survive is a stressful, time-consuming endeavor. Simply owning shares of publicly traded restaurant chains isn't always a less risky or more rewarding approach, either.
There's one noteworthy exception to this norm, however. That's McDonald's(NYSE: MCD). The 68-year-old company has perfected the art and science of managing thousands of fast-food locales. You can plug into this success at a fair price, and have confidence that your investment will produce good returns in the near and distant future.
There are numerous reasons you should buy McDonald's stock like there's no tomorrow, but four stand out.
4 reasons McDonald's stock is a great pick
You know the company. McDonald's is of course the world's biggest restaurant chain, operating 41,822 locations around the world. It wouldn't be unfair to say the company is the epitome of how a fast-food chain should operate. It's also consistently profitable, remaining mostly unfazed even by the early, difficult days of the COVID-19 pandemic.
MCD Revenue (Quarterly) data by YCharts
What makes McDonald's stock such a great pick right now, however, isn't an arbitrary gut feeling about the future based on its past. The secret to this company's long-lived success isn't a secret at all. Four crystal-clear factors work in the organization's favor that its competitors often try to imitate but rarely actually duplicate.
1. Its brand name is a draw in and of itself
If simply seeing McDonald's golden arches or hearing one of its musical jingles induces a craving for a Big Mac, that's not a coincidence. McDonald's has invested a lot of time and a lot of money in effective branding, right down to figuring out that the shades of red and yellow you see on its signage inspire happiness at the same time they increase your heart rate. Indeed, the company's been linking up its logo and colors with its television commercials and jingles for so long now that merely seeing or hearing an ad -- or spotting golden arches from a distance -- gets you thinking about those crispy fries!
The result? McDonald's and its golden arches are (literally) one of the world's most-recognized brand names and logos of all time. This makes it much easier to market the company's service, as the audience is already eagerly receptive to these messages.
2. The business model is ridiculously resilient
You may think McDonald's core business is selling hamburgers. That's not the case, though. The company is mostly a real estate conglomerate these days. It just so happens that its tenants' core business is selling hamburgers.
Most McDonald's franchisees don't own the building where they're doing business. The parent company does, renting this space out to operators at market rates. Unlike mortgage payments, these rent payments go up over time. While the organization doesn't readily disclose these details, roughly one-third of its total revenue comes from rent. That works out to be around two-thirds of the total its franchisees pay the parent company each and every year. Franchisees are, of course, also required to purchase their supplies from the McDonald's corporation.
As you can imagine, the franchisor's strong-arm model has been a point of contention with franchisees over the years ... and increasingly so! It just doesn't matter. Because the brand name itself is so powerful, operators of the 95% of its restaurants that are franchised continue paying these steep, rising costs.
3. The dividend is solid, and grows consistently
These reliable rent and royalty payments translate into reliable cash flow. The company just as reliably turns these into dividends for shareholders. As of the latest look, McDonald's stock is yielding an above-average 2.5%.
It can afford these dividend payments too. The $6.23 worth of dividends it dished out on a per-share basis last year is just a little over half the per-share earnings of $11.56 it produced during the same 12-month stretch.
Perhaps the more poignant point to draw out about the company's dividend, however, is not only how long it's been reliably paid, but reliably raised. With October's increase in its quarterly payout, McDonald's total annual dividend payments have now been raised for 47 consecutive years. That's one of the stock market's very best dividend pedigrees.
4. McDonald's stock is just plain ol' undervalued
Last but not least, McDonald's stock isn't merely cheap right now. It's undervalued.
It's a somewhat surprising argument given shares' recent performance. Although not by leaps and bounds, McDonald's shares are up for the past two-, three-, and five-year timeframes, and still within easy reach of the record high made in January of this year. Not bad.
Except, even with that relatively good performance, this stock remains well below analysts' consensus price target. They're saying shares are worth $325.46 apiece, which is 22% better than the stock's present price. Indeed, the stock's current price is well below the lowest of all its current analyst targets ... most of whom, by the way, rate McDonald's shares at a buy or better.
Investors as a whole may not be big believers in the company right now. However, there's a reason that the analyst community is sticking with its collective bullish opinion.
You could certainly do worse
Are there more exciting stocks out there to buy? Sure. There's no double-digit growth in the cards here, and while the dividend is rock-solid, you can find higher-yielding names as well.
From a risk-versus-reward perspective, though, there's not a lot not to like about this prospect.
And for what it's worth, these four primary reasons to buy McDonald's stock have been the stock's top bullish arguments for years now. They're not likely to change at any point in the near or distant future, making McDonald's the kind of holding you can tuck away for years at a time and not worry about constantly watching.
Should you invest $1,000 in McDonald's right now?
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
