According to the National Restaurant Association, 110,000 restaurants closed in 2020. However, the sit-down restaurants did not fall under the popular category of fast foods. Restaurants, such as McDonald’s and Taco Bell, have gained from the mobile habits acquired by customers for ordering fast food during the pandemic.
In April 2021, McDonald’s reported that its 1Q earnings showed an increase of 13.5% with 40 million active app users in its six major markets. The fast food chain hopes to attract even more customers through a loyalty program it plans to introduce later this year.
McDonald’s has been a proven winner for at least the past 30 years, so it may be too pessimistic of skeptics to assume the healthy food trends sweeping the nation will disrupt it. Indeed, U.S. News and World Report states that fast-food chains prevailed in the marketplace during the last 12 months, ending in March 2021.
Fast food restaurants received 70.2% of the dollars spent from customers eating out and almost 83% of restaurant traffic. This data was resourced from the research company, the NPD Group and was not, previous to this report, made public. From this information alone, investing in fast foods does indeed look like a smart investment.
The things that draw customers to fast-food restaurants are their drive-thrus or foods, such as family meals or crispy chicken sandwiches. During the year-end in March, almost $282 billion was spent in the fast food marketplace, which gained just over 7% of the market share in dollars that full-service restaurants lost.
McDonald’s Financials and Growth Forecast
McDonald’s Corporation franchises and manages McDonald’s restaurants all over the world. At the end of 2020, McDonald’s operated 39,198 restaurants. Based in Chicago, Illinois, the popular fast food company was founded in 1940.
McDonald’s is financially attractive in 3 primary ways.
- The fast food chain’s PE ratio is 33x, below the average in the hospitality sector whose PE is 39x.
- The company’s earnings are forecast to grow at almost 9% annually.
- The company pays a dividend of 2.2%.
There is a significant financial risk that should be noted when investing in McDonald’s stock. The debt is not adequately covered by the restaurant company’s operating cash flow.
Why McDonald’s Is a Great Stock
One analyst asserts that MCD meets the following criteria for ongoing revenue earnings.
- The company is profitable.
- Earnings are projected to grow by 8.7% per year over the next 3-year period.
- The share price is stable.
- Earnings are high-quality.
- Shareholders have not been diluted.
- While MCD does have negative shareholder equity, the activity results from the company’s share buybacks.
Why the S&P 500 Is a Proven Investment
According to Nasdaq, the S&P 500 is a proven winner when it comes to investing. If you invest in S&P 500 Index funds for retirement, you can meet your milestones and realize a good income in your golden years, which in this case will truly be “golden.”
To see why the S&P is a proven investment, you first need to define what it represents. The S&P features a collective of 500+ organizations that account for around 80% of the stock market’s entire value.
Therefore, S&P 500 companies drive most of the market’s performance. Whenever anyone refers to the “market,” they are referring to the S&P 500, the major determinant of how stocks are doing as a whole. That is why the S&P 500 is considered a proven investment.
McDonald’s vs S&P 500
According to research firm S&P Capital IQ, McDonald’s shares have returned almost 17%, on average, annually, compared to the S&P’s average return of about 11% per year. As you might surmise, that kind of difference adds up fast, especially when you include dividends.
If you had invested only $500 in the S&P in 1980, it would be worth about $15,000 today. By comparison, if you had invested that small amount in McDonald’s, the total worth would be $73,250 currently.
While you cannot scoff at the amount you can make from the S&P 500, you could certainly add McDonald’s into the mix when scouting for long term investment prospects.
Pros and Cons of McDonald’s vs. S&P 500
As noted, the debt for McDonald’s is not sufficiently covered by the company’s operating cash flow. You don’t have to worry about this possibility with the S&P 500 given its diversity.
While you generally do not want to place all your eggs in one basket, most investors rest easier when they have a more diversified and dependable investment, such as the S&P 500 Index. True, you might not make as much money, over time, as you could have done with McDonald’s, but the risk mitigation was higher.
However, with that being said, McDonald’s is still continuing on its course of beating the S&P 500, as it has done in the past. According to Yahoo Finance, McDonald’s promotional strategy differentiates the restaurant from the competition. McDonald’s future plans include focusing on delivery, technology and innovations to foster continued growth.
Delivering double the growth of the S&P 500 during the past year, MCD stock shows further potential for capital increases. The company’s investments in technology are giving the brand a competitive advantage.
For example, McDonald’s plans to customize its drive-through menu, based on the food items that are trending, time of day, and local weather activity to enhance customer service. It plans to improve efficiency by having food orders with reduced preparation times suggested to customers during peak times of the day.
In addition, McDonald’s plans to use AI to improve its mobile app offerings, personalizing online ordering for its customers.
The company also plans to add menu items in one geographic region into other locales to give customers an increased selection of foods. If you are interested in supporting at least one stock that you could also include in a portfolio with an S&P 500 index fund, McDonald’s would be the stock to choose.
Both the S&P 500 and McDonald’s are good picks. Of the two, however, McDonald’s has historically outranked the S&P 500 and could well continue to do so.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.