Focus Stock of the Week (MCD)

in money •  4 months ago 

A capital-efficient stock to hold forever.

Ray Kroc did not invest the hamburger but he turned a simple idea into one of America's great success stories. The first McDonald's (NYSE: MCD) franchise started in 1955 now selling beloved products worldwide. With a world recognized brand the company has more than 36,000 restaurants in more than 100 countries across the world.

McDonald's continues to innovate by adjusting to customers needs over the years such as all day breakfast, healthier meals and now food delivery.

In 2017, McDonald's partnered with ride-sharing firm Uber's food-delivery service Uber Eats. The alliance allowed McDonald's customers to get their burgers and fries delivered straight to their door. This looks likes a great success with the average delivery order double that of the average in-restaurant order.

McDonald's has been able to accomplish these great feats and remain one of the most capital efficient companies in America. The secret rest in McDonald's franchising model pushing the capital intensive expenses to the owner of the physical restaurant. Allowing McDonald's to sit back and collect royalties.

The proof is in the numbers, with 1 year sales of $21 billion, McDonald's earns $4.6 billion in free cash flow (FCF). FCF is a measure of a company's cash profits (cash from operations) less capital expenditures (capex). Most companies are lucky to provide FCF of 10% of revenue while McDonald's crushes it by earning 22%.

FCF is used by companies to reward shareholders, make acquisitions, pay down debt or expand. McDonald's chooses to reward shareholders by paying out more than $3 billion in dividends and additional $4 billion in buying back stock. Over the last 5 years shares outstanding have fallen by 25% (meaning long term shareholders own 25% more of the company).

Not only do shareholders receive great rewards with dividends but the share price has been much less volatile than the over all market. You will not become an overnight millionaire but the consistent profits will add up over time.

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These types of companies are great for bear markets and also to just hold onto forever.

Keep it simple and buy capital efficient companies.

Disclosure: I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article. The information provided should NOT be considered advice. The topics discussed are risky and have the potential to lose a substantial amount. I am not an investment professional and therefore do not offer individual financial advice. Please do your own research before investing.

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