McDonald’s (NYSE: MCD) has delivered strong performance over the last 25 years. Its approach to franchising has quietly given it market-beating returns over that time.
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Admittedly, its approach to franchising may make it seem less like a restaurant business on the surface. However, even if investors do not understand the model, they probably should not complain about the results. After investing $1,000 in the consumer discretionary stock 25 years ago, one would have $16,670 today.
Interestingly, around $10,000 of that return came from dividends, while the stock by itself slightly underperformed the S&P 500 during that period. McDonald’s initiated its dividend in 1976 and has raised it every year since.
Moreover, it accomplished these gains with its unique approach to business. The majority of McDonald’s restaurants are franchises, making it more asset-light than a restaurant like Chipotle, which owns and operates all of its restaurants.
Of course, franchising is hardly unusual in the restaurant business, but McDonald’s has stood out for a heavy emphasis on brand consistency. Also, its revenue stream relies heavily on franchisee fees, including a 4%-5% fee on sales and a minimum 4% fee for advertising and promotions.
Still, it may surprise investors that much of its success may come from real estate investing rather than from serving food. It owns the building for every McDonald’s. Thus, the rent is still paid even if the fast-food business is slow. As a result, McDonald’s benefits from fairly steady revenue regardless of the state of the economy.
With that approach, the company has expanded to more than 45,000 restaurants across more than 100 countries, and such a size may spark concerns over global saturation. Nonetheless, rising rents and an increasing population can still help it expand, meaning investors should expect its business model to continue driving stock price and dividend gains for years to come.
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