Admit it, there’s no better feeling than pulling up to a McDonald’s drive-thru at 1 AM and hearing the friendly voice over the intercom say “Welcome to McDonald’s, how may I help you today?”
Several thoughts rush through your head. What should I get? Burgers? Fries? Maybe a nice cold drink to wash everything down? “I’ll get a Big Mac combo with coke please.” You make your order and impatiently wait as the car in front of you gets their food. You drive up and as soon as your meal comes out of that window, you know you made the right choice.
Eating too many Big Macs might not be the best thing for you in the long run, but investing in the creator of the classic American hamburger definitely has its benefits.
About the Company
The world’s largest restaurant chain serves approximately 68 million customers everyday across 119 different countries. With over 36 000 locations worldwide, McDonald’s Corporation is the largest retail land owner in the world. Think of all those people that experience a similar happiness when they are served their orders. By delivering a consistent and satisfying customer experience, McDonald’s has solidified itself amongst the world’s most successful companies
New Management, New Direction
With the appointment of CEO Steve Easterbrook in 2015, the culture of the brand is changing and it’s safe to say the food you order, and how your order it will never be the same. As a company that has been historically able to capitalize on consumer trends by introducing various menu items, McDonalds has expressed a commitment in moving towards healthier ingredients. In most cases, natural products cost more money, making it a challenge to offer quality food along with the value people expect from McDonald’s.
Easterbrook has a plan for dodging these high costs. He believes that automating the order process will minimize the need for employees and offset the cost of purchasing healthier ingredients. The electronic self-serve kiosks could bring the largest service revolution to the fast food industry since the creation of the drive thru.
If you haven’t already been to a McDonald’s with a self serve kiosk, you are missing out. Swift orders, shorter lineups and no human error on the technology’s part allows for a whole new customer experience. Faster orders could increase total sales and the issue of retaining customers in long lines during peak hours will become much smaller. Additionally, this technology could easily be extended to a mobile app, further decreasing the wait to order.
McDonald's Canada CEO John Betts aims to have this “restaurant experience of the future” across the country by 2017, marking the Company’s 50th anniversary in Canada.
No doubt, competition is intense in the restaurant business. But over the years, McDonald’s has built a very wide economic moat. With unrivaled brand name recognition, you know exactly what you are getting when you see the iconic golden arches.
Sitting comfortably at a net profit margin of 19% in the last 5 years, there is no better time for McDonald’s to bring out the kiosks.
In comparison, the company with the second largest market share in the fast food industry, Yum! Brands Inc, had a net profit margin of 10% over the last 5 years.
McDonald’s anticipates a notable hit on their profit margins in the next year as they install kiosks across the country and make the transition to healthier ingredients. However, the profit margins can expect a fast recovery as the technology replaces labour costs. The decreasing average wait time to order will also significantly increase their top line revenues from additional sales.
Dividends: The make or break
As an established company with a solid track record, McDonald’s has shifted its focus from reinvesting profits into the business to maximizing shareholder wealth. By consistently giving out dividends McDonald’s has boosted shareholder morale, earning the reputation of a solid dividend stock. Since 1976, McDonald’s has increased its dividend payout every single year.
In 2015, a whopping 71.32% of net income was paid back as dividends and McDonald’s dividend yield is 3.2%. Shareholders generated immediate return, but the company still has ample room to invest the rest in other shareholder benefitting activities, such as the automation of the order taking process.
In comparison, the S&P 500 index had an average dividend yield of 2.2 % in 2015.
McDonald’s prioritizes a strong dividend payout and the expected drop in profit margins over the next year shouldn’t affect dividend growth significantly. Instead, McDonald’s is compensating the expected profit margin loss by increasing its financing sources. In 2015 alone, the company, took on 10,220 million dollars of debt, a 663% increase from its 2014 debt intake. Despite this, McDonald’s shows a strong capability of paying off this large debt in the future as its net profit margins increase year to year, providing a large and sustainable source of cash flow.
Overall, the switch to automated self-service and healthier ingredients indicates a largely positive outlook for shareholders. As an established brand, with a solid track record since its IPO, McDonald’s has grown into the solid blue-chip company it is today by consistently delivering value and satisfaction to consumers. Its stable stock has historically provided long term returns and has a strong reputation of performing well during economic downturns. The beauty of owning McDonald’s shares is that you don’t go to sleep worried about what the stock price will be the next day. Instead, the company is best held long term as it pays back dividends year after year, all while the stock price can expect to gradually increases.
As Warren Buffet once said “Our favorite holding period is forever.”