The birth of modern fast food can be attributed to McDonald’s and its subsequent expansion across different parts of the world. The company is an iconic American brand. It can be considered one of the most remarkable cultural exports of the United States and it remains one of the most recognizable companies in the world due to its aggressive marketing efforts and persistent global expansion. This article explores and discusses the pros and cons or advantages and disadvantages of investing in McDonald’s stock.
Big Macs and Big Bucs: A Look Into the Advantages and Disadvantages of Investing in McDonald’s Stock
Pros: Advantages of McDonald’s Stock
McDonald’s has popularized the fast food industry and has continued to be one of its dominant players. It owns and has franchised more than 40000 stores in over 100 countries. The company has built its success on the fast-food concept and its franchising business model while also leveraging its financial resources to retain brand recognition.
The company has also made significant investments and partnerships to expand its delivery services. Furthermore, aside from its fast food operations and franchising agreements, it also derives its revenues from its dedicated albeit related real estate business. The following are the specific advantages of McDonald’s stock:
• Large-Cap Stock Advantages: McDonald’s has a market capitalization of over $240 billion. It is a large-cap stock. Investing in large-cap stocks has several advantages over mid-cap stocks and small-cap stocks. These include stability, an established business model, strong management capabilities and corporate governance, transparency and availability of market information, and higher liquidity.
• Record of Dividend Payments: Investing in this company can be a potential source of passive income. This is another advantage of Mcdonald’s stock. Its preferred stock has a strong record of releasing quarterly dividend payouts to its preferred stockholders while its common stock has also released dividends to its common stockholders during periods of strong and favorable financial performance.
• Diversified Revenue Streams: The company generates revenues from the operation of its fast food restaurants and through the fees received from its franchise holders. This two-fold revenue stream remains its main source of income. However, aside from its fast food business, the company is also a real estate business that generates revenues by renting real properties to its franchise holders.
• Adaptive Business Strategy: McDonald’s has a record of adapting to the changing needs of the market and current business trends. It has made several technological investments aimed at improving customer experience, operational efficiency, delivery services, and value creation. It has used market research to adapt its menu or food offerings based on the local preferences of its regional markets.
• Strong Management and Leadership: Investing in McDonald’s stock means banking on the management and leadership capabilities of its executives and upper-management personnel. Its strong business acumen has been demonstrated by its strong cash flow and steady revenue growth. The company has been acknowledged for having a strong financial position and a disciplined approach to capital allocation.
Cons: Disadvantages of McDonald’s Stock
The competitive environment of the fast food industry and the greater restaurant industry has become competitive. McDonald’s competes with other fast food chains such as Burger King, Dunkin, KFC, Starbucks, Subway, and Taco Bell, among others. It also competes with other companies providing alternatives to fast food products.
Adding to the aforementioned is the fact that McDonald’s and other fast food companies are part of the consumer cyclical or consumer discretionary sector. Their revenues and profitability are dependent on specific macroeconomic factors and overall economic conditions. The following are the specific disadvantages of McDonald’s stock:
• Cyclical Nature of Its Stock: One of the main disadvantages of McDonald’s stock is that it is a cyclical stock. This means that the company can be negatively affected by unfavorable macroeconomic factors. Its financial performance is tied to the boom and bust phases of the economic cycle and its revenues and profits tend to decrease during periods of economic downturns or recessions.
• Impact of Competitive Forces: The company also has to struggle with the impacts of different forces in its competitive environment. The bargaining power of its consumer has become more pronounced due to the emergence of other fast food restaurants and threats from substitutes from companies offering alternatives to fast food products. These forces compel it to spend more on marketing and branding.
• Changing Consumer Preferences: It is important to underscore the fact that fast food consumption has been criticized for its supposed negative impact on public health and individual well-being. Some consumers have leaned toward healthier food alternatives while also demanding fast food companies to revamp their menu practices. This could affect the financial performance of McDonald’s.
• Risks from the Forex and Inflation: Investing in McDonald’s stock exposes an investor to currency and inflation risks. The company generates a significant portion of its revenues from its operations outside the United States. Fluctuations in foreign exchange rates can impact its finances. It is also exposed to inflation risk. Periods of high inflation affect its sales and could compel it to raise its prices.