“I’ll have a hamburger. No cheese. Ketchup only. No fries. Thanks.”
That’s my go-to order when I treat myself to the Golden Arches (McDonald’s) across the street from my office. As hard as it is to resist their fries, I have a strict calorie count for each day.
It’s been more than a decade since I put together the deal that transformed that vacant lot into a store for one of the world’s largest fast-food franchises.
In that time, I’ve seen plenty of businesses come and go in the neighborhood.
But let me tell you, every time I glance out the window, I can see that McDonald’s (MCD) has a steady stream of customers. Rain or shine. Recession or not.
Here at the Intelligent Income Daily, we’re focused on finding the safest income investments on the market. One way to find companies with resilient income is to look at your own spending, and see what expenses you just can’t do without.
Today I want to tell you about “burgernomics” and what McDonald’s latest earnings report tells us about the state of the economy. I’ll also explain how its shares could be a tasty addition to an income portfolio but why I don’t think you should buy right now.
Big Mac “Burgernomics”
Have you heard of the Big Mac Index?
It was invented by The Economist in 1986 as a fun way to illustrate the purchasing power of different currencies.
Below is a chart showing the Big Mac Index in action, which values a country’s currency based on the average price of their Big Mac in comparison to the price of a Big Mac sold in the U.S.
For example, a Big Mac costs an average of $5.36 in the U.S.
At current exchange rates, that converts to £4.29. But the average price of a Big Mac in Britain is just £3.79. As you can see, this suggests that the British pound is undervalued – you can buy more stuff with the equivalent amount in pounds sterling than you could with dollars.
The reason the Big Mac index works is because McDonald’s is so common around the world. We don’t know exactly how many burgers the chain sells, but an estimate in 2013 put the number at around 75 burgers per second, or nearly 6.5 million every day. It’s probably higher now.
Grabbing a meal from McDonald’s has become routine for many reasons. It’s convenient and the quality is reliable. Whether you’re just grabbing a quick bite on your daily commute or trying to appease a screaming kid in the back of the car, McDonald’s is a “safe” choice that satisfies without being too hard on the wallet.
That’s why even though dining out at restaurants is usually one of the first things to get cut when money is tight, McDonald’s still gets steady business even when times are tough.
Since McDonald’s is so common across the country and around the world, the company often serves as a good indicator of how the economy is doing.
In its earnings report last week, McDonald’s impressed investors with a 12.6% increase in sales over the previous year, showing that consumer demand is still strong. However, a large part of that boost in sales was due to price increases as the company passed along higher costs from inflation.
Though price increases have slowed a bit, McDonald’s still expects “mid- to high single-digit inflation” this year. And while many companies were having trouble hiring enough people, McDonald’s has seen the labor shortage starting to resolve.
Still, the company sees a “challenging” economic environment ahead. The CEO told investors that he’d started seeing customers buying fewer items per order, such as skipping the fries.
But at the end of the day, McDonald’s strong brand and efficient business helps the company perform well both in good times and in bad.
That reliability makes it an excellent choice for an investment portfolio focused on safe, growing income. McDonald’s has increased its dividend every year for 47 years.
Over the past decade, its dividend has grown at an average rate of 7%, and last year the company rewarded shareholders with an outsized 10% raise.
However, a company can have a great business but a bad stock price. Impressed by the company’s latest results, investors have pushed shares to an all-time high at 27X earnings. That’s pretty expensive, and drops the yield down to just 2.1%, one of the lowest rates McDonald’s shares have ever offered.
That’s why I’m staying away for now. But, when McDonald’s makes it back onto the value menu, I’ll be sure to let you know.
Now is the time to keep your portfolio growing so that you can continue buying your Big Mac no matter what happens in the market. And go crazy, say yes to those fries.
Happy SWAN (sleep well at night) investing,
Brad Thomas
Editor, Intelligent Income Daily
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Source: Wide Moat Research