I’m looking at McDonald’s (NYSE:MCD) as an income stock to add to my portfolio in 2023. With a recession on the horizon, I think that this could be a really good investment.
The company’s stock isn’t cheap. It trades at a price-to-earnings (P/E) ratio of 34, which is high compared to other companies in today’s market.
A high price tag is a significant risk with interest rates rising. But I think that McDonald’s has an advantage over its competitors that will prove valuable in a recession.
Pricing
While McDonald’s shares are expensive at today’s prices, its food is not. And I think that this will prove important in a recession.
In an economic downturn, I expect people generally to be more economical with their spending choices. That means that price to consumer is likely to be important.
In my view, it’s not an accident that McDonald’s is able to offer lower prices than its competitors. Rather, I think it’s the result of structural features that enable this.
Real Estate
McDonald’s operates its business on a franchise model. That means that individual operators pay a franchise fee to the company in order to run a business using its resources.
Usually, this means that costs are low for the franchise owner. The costs of acquiring a building, for a new outlet, are taken on by the franchisee and the central company just takes a share of the revenues.
McDonald’s is unusual in this regard, though. Unlike other businesses that run franchises, McDonald’s typically does pay to acquire the buildings in which its franchises are housed.
Income
This is better in some ways than a traditional model, but worse in others. The downside is that it makes expansion more expensive and capital intensive, since McDonald’s has to put up the cash to acquire new buildings.
On the positive side, though, it gives the company an additional revenue source. McDonald’s can generate revenue from leasing the buildings to franchisees.
This means that the company can price its food competitively. Since it already has an independent source of income, McDonald’s doesn’t need to rely on its food sales for profits.
It’s this additional revenue source that McDonald’s has that allows it to charge lower prices than its competitors. Other companies that only have food sales as an income need to maintain wider margins and charge higher prices, which I expect to be a problem in a recession.
Passive income
I’m expecting McDonald’s to use its competitive advantage to generate steady dividends through difficult economic conditions. This, I think, will make it a good income stock for me to own in 2023.
The company’s dividend is currently growing at 7%. If this continues — and I believe that it can — then the company should reward investors like me over the long term.
