When most investors are on the lookout for major investment opportunities, McDonald’s doesn’t typically come up as a top choice. But maybe it should be part of the conversation.
There’s no question about McDonald’s (MCD -0.02%) reigning as the leader in the fast-food sector. Known for being the largest hamburger chain in terms of both its number of locations and revenue, McDonald’s business model is the benchmark for successful restaurant franchise operations. This reputation contributes to the consistent performance of McDonald’s stock.
Yet, the idea of McDonald’s as a millionaire maker is a different discussion. The company is still tied to the fast-food industry’s overall health, which doesn’t boast high growth. Turning a modest investment in McDonald’s into a seven-figure return could indeed take some time.
Still, there’s a special element in McDonald’s strategy that might accelerate this process more swiftly than expected.
But, let’s set the stage first.
Understanding McDonald’s: Reality vs. Perception
We all recognize the brand. With nearly 43,000 outlets, McDonald’s isn’t just the largest name in the burger business, it’s also arguably the most popular and nostalgic brand—an advantage that continues to benefit the chain.
However, it might not be exactly as you perceive it. Only around 5% of these restaurants are owned and run by McDonald’s itself. The rest are franchises under the management of individuals and third-party operators who capitalize on the brand’s strong identity.
At first glance, this might seem unimportant. Restaurant franchises typically operate under a franchisor’s rules and get their supplies from approved sources. In exchange, the franchisor offers brand support and promotion.
McDonald’s stands apart from its fast-food counterparts in a few ways. First, it imposes higher capital requirements, royalties, and operational expectations on its franchisees than is usually seen in the industry. Secondly, unlike most fast-food franchises, McDonald’s franchisees lease the properties from the parent company rather than owning them, paying market-adjusted prices for this privilege.
This setup classifies McDonald’s among the leading real estate companies globally, boasting over $40 billion in properties and equipment. This aspect significantly benefits shareholders.
How McDonald’s Ownership Benefits Shareholders
In essence, McDonald’s franchisees shoulder most of the business risks. The corporation collects royalty rates between 4% and 5% of each store’s gross sales, irrespective of the store’s profitability. Rent payments are also based on a percentage of revenue, unaffected by individual store profits.
The connection here is clear: even if operational costs rise, McDonald’s corporation’s revenue remains steady and often grows, paralleling inflation at the least. For shareholders, this translates into decades of steady revenue and profit growth.
Data source: YCharts
McDonald’s real ace, however, is its dividend. The company has steadily paid dividends since 1976, enhancing the annual per-share dividend every year over the past 48 years. This sustained dividend increase underscores McDonald’s financial stability and its command over the fast-food sector.
The pressing question remains: Can McDonald’s be a stock that makes one a millionaire?
Yes, it can, but there’s more to consider.
Maximizing Returns with McDonald’s Stock
McDonald’s isn’t positioned as a growth stock in the realm of tech giants like Nvidia or Amazon. The fast-food market is mostly saturated, meaning any future growth will largely come from population increases—even for the most dominant player in the industry. Over recent years, McDonald’s earnings before interest, taxes, depreciation, and amortization (EBITDA) have climbed by an average of about 3.3% annually.
Why, then, has McDonald’s stock price surged nearly 1,700% over the past 30 years? The answer lies in another way the corporation adds value: through stock buybacks from the open market. Over this same period, McDonald’s has utilized its steady profits to reduce its outstanding shares from approximately 1.4 billion to a little over 700 million, which enhances all financial metrics per share.
This strategy forms only part of the millionaire-making secret. The other half involves using McDonald’s expanding dividends to buy additional shares. A $30,000 investment in 1994 with reinvested dividends would now be valued at a cool $1 million.
Data source: YCharts
Of course, past success doesn’t promise future results. Thinking the upcoming 30 years will replicate the favorable conditions of the previous three decades would be unwise. Current and potential franchisee interest in McDonald’s evolving franchising terms requires careful observation by investors.
Despite everything, successful companies often retain their status owing to their significant market presence that keeps competition at bay. At the very least, McDonald’s offers that powerful competitive edge.
For investors, patience is a virtue: let time and dividend reinvestment work their magic.
