McDonald's: Profits With Side of Dividends

This year is off to a bearish start, but McDonald's should be able to ride out any uncertainty and respond nicely to brighter conditions.
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OAK BROOK, Ill. (TheStreet) -- When legendary money manager Peter Lynch picked stocks at Fidelity Investments, he stuck to the credo "invest in what you know." Few investors don't know McDonald's (MCD) - Get Report.

Mickey D's has been a fixture in U.S. communities for 70 years. As the pioneer of modern fast food, few investors are unfamiliar with the company or its business model.

Global diversification and a strong brand make McDonald's a solid investment, especially during turbulent times. Low food prices and shrewd franchising has helped keep the chain profitable throughout the recession, and analysts expect earnings to increase this year.

While McDonald's golden arches have become a sign of American influence throughout the world, the company has succeeded abroad by tailoring menus to local tastes. Only 34% of the company's revenue comes from the U.S.; Europe accounts for 42% and 18% originates from Africa, Asia and the Middle East.

Companies with international diversification don't need to rely on a single country to drive demand. However, McDonald's products are priced so low that economic conditions are almost inconsequential. A 49-cent hamburger leaves little room for undercutting. Despite its rock-bottom prices, the company produces an operating margin of 29% and a profit margin of 20%.

While the business of fast food seems simple, McDonald's is a more complex company than many would expect. About 32% of revenue is derived from franchise fees, which are based on food sales. This structure can make performance more volatile, but it allows the company to reap the benefits of successful marketing campaigns and new product launches more directly than franchising competitors, such as

Burger King

(BKC)

and

Yum! Brands

(YUM) - Get Report

, which operates Taco Bell and KFC.

With a dividend yield of 3.5%, McDonald's stock is a big-time income generator. The shares have gained 19% during the past year, trailing behind the 42% advance of the

S&P 500

. But the two-year return for the stock is an impressive 24%, even as the market dropped 31%. McDonald's shares have a beta value of 0.56, which means they've been less volatile than the broader market.

McDonald's shares aren't the cheapest, but analysts expect the company's earnings to rise 11% this year on revenue growth of 5%.

Credit Suisse

(CS) - Get Report

recently upgraded the stock to "outperform," suggesting the stock may be primed to keep pace with modest gains.

Some investors might point to ethical concerns as a reason to avoid McDonald's shares. Reports have linked McDonald's to everything from the destruction of the Amazon rainforest to global warming caused by shipping and livestock demands. The company has been trying to be a better corporate citizen by paying more attention to the sources of its coffee beans and the composition of its frying oils. These are tiny steps, but better than nothing.

McDonald's battles formidable rivals in the mature fast-food industry, but a company that offers steady success with solid dividends is as close to a sure thing as the market can provide. This year is off to a bearish start, but McDonald's should be able to ride out any uncertainty and respond nicely to brighter conditions.

-- Reported by David MacDougall in Boston.

Prior to joining TheStreet.com Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level III CFA candidate.