Anyone who has read biographies on the life of McDonald’s Corp. (NYSE: MCD) Ray Kroc or seen the movie “The Founder” is aware that the fast food giant is less in the hamburger business than in the real estate business. Ray Kroc made his fortune on that assumption. He ran with it, wrestling the company (depending on who is telling the story) away from the original founders, the McDonald brothers in San Bernardino, CA.
Even former McDonald’s CFO Harry J. Sonneborn, who died in 1992, publicly validated the strategy, which had become its worst-kept secret. Sonneborn was quoted as saying, “We are not technically in the food business. We are in the real estate business. The only reason we sell fifteen-cent hamburgers is because they are the greatest producer of revenue, from which our tenants can pay us our rent.”
McDonald’s Made Huge Purchases At The Turn Of The Century
In the late 1990s and early 2000s, McDonald’s went on a buying spree to increase its real estate holdings, scooping up locations of food establishments such as Chipotle Mexican Grill Inc. (NYSE: CMG), Krispy Kreme Inc. (NASDAQ: DNUT), Boston Chicken (now Boston Market) and Domino’s Pizza, Inc. (NYSE: DPZ) because of the land they were on.
The company eventually sold between 2000 and 2008, in part because of the recession. But in that recession, McDonald’s also jumped on rapidly declining property values by buying even more of the land where its restaurants reside. The company now owns almost half of its restaurant land and 75% of its buildings, with the remainder being leased.
So Is McDonald’s Still A Good Buy?
But is McDonald’s still an excellent real estate investment stock? For one thing, with all the stores and real estate it currently owns, the company lost only 240 locations last year, representing a default rate of 0.6%. Those numbers would attract anyone wanting to invest in a particular REIT. Will McDonald’s ever spin off into a REIT? Based on the prime locations of many of its restaurants, investors are drooling at the potential. But financial experts don’t think it will happen soon because its landlord income is too lucrative.
McDonald’s gross profit in the first quarter of 2022 was $3.050 billion, representing a 14.31% increase year-over-year. That tops its record in 2021 of $10 billion in annual operating income, which followed a rough pandemic performance. It’s one of the factors making McDonald’s stock a more-than-reliable real estate investment whose numbers appear poised to keep producing positive shareholder value and returns for decades to come.
But for many investors, putting money into McDonald’s stock has been the 1990 blue-chip equivalent of Procter & Gamble Co. (NYSE: PG), Coca-Cola Co. (NYSE: KO) and Philip Morris International Inc. (NYSE: PM). However, because investors have recently flocked to the stock’s relatively more secure investment case, some are worried McDonald’s valuation has reached elevated levels.
But with a price-to-earnings ratio of 25 and a price-to-free-cash-flow ratio of about 27, representing a nearly five-year average, few indications show that the McDonald’s restaurant and real estate model is in danger of decline.
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