No matter the market conditions, some stocks stand the test of time as if economic booms and busts don’t matter. When you stumble across those stocks it’s worth seriously considering adding them to your portfolio.
When markets fall, retail traders on average suffer more. One research report showed recently that with markets down 21% this year, the average retail trader was in the red by 32%. It’s no surprise because the average retail trader underperforms the market because, as a group, they take on more risk than holding an index, like the S&P 500.
To balance out those larger portfolio swings compared to major market averages, consider this one monster stocks with a proven track record that could pay you passive income for decades to come.
The Most Successful Burger Joint Of All
At last count, there were 91,214 burger restaurants in the United States alone. That’s a lot of competition if you’re in the business of selling hamburgers, yet one company has for decades stood head and shoulders above the rest in terms of sales and market capitalization: McDonald’s.
What makes Mickey D’s special from an investor perspective is its extraordinary financial efficiency. Despite the popularity of its dollar menu, McDonald’s has a gross margin of 54%. In 2021, the company reported $9.8 billion in operating income alone. And last year, it grew top line sales by 20.9% to $23 billion.
How can this fast food giant generate such extraordinary margins and profits?
There are three primary reasons:
- McDonald’s employs a franchise model that transfers capital costs to franchisees, while it enjoys royalties.
- Unlike smaller competitors, McDonald’s can leverage its scale to negotiate better contracts; it can buy goods at lower costs per unit.
- McDonald’s has ruthlessly efficient processes that cut wasteful costs.
And while McDonald’s is not immune to recession, it does perform better than most stocks in the market when times are grim. For example, when the S&P 500 was down 23% for the year, McDonald’s was down about half that amount, or 12.8%.
Moreover, McDonald’s has an attractive dividend of 2.35%, a payout ratio of 66.3% and a 46 year growth streak from our research. Those figures all suggest that reliability, predictability, and stability of dividends can be counted on for years and more likely decades to come.
A company that has not broken its streak of paying higher dividends through the 1987 crash, the 2000-02 technology bust, the Great Recession, COVID, and the latest market crash likely has the fortitude to stand the test of time.
Is McDonald’s a Buy?
Future estimates for McDonald’s are appetizing. The company is expected to report $26.6 billion in sales by 2026 and $13.4 billion in operating income. It’s easy to gloss past revenues rising by just 15-20% in the next 3-4 years but the key number to focus on is operating income up by over 30%. That’s the kind of efficiency Wall Street rewards.
Sales growth is important and a proxy for market share capture but profits are what Wall Street research analysts pay attention to when evaluating the fair value of a company. And when a company turns modest sales growth into attractive profitability, it suggests the organization is becoming more operationally efficient and deserves a higher valuation.
Perhaps that’s why the consensus among 34 analysts is for McDonald’s fair value to reach $281.44 per share. If they are right, McDonald’s has around 16% upside and will pay a 2.35% dividend for those willing to wait for the share price to bounce back.