McDonald’s: collecting rent, royalties, and dividends

On Monday, I wrote about Nike (NKE) with its iconic Swoosh.

On Tuesday, we discussed Starbucks (SBUX) and its siren’s call.

Today, let’s go with “enormous American brands that have fallen out of favor” for $300. The clue: “This global fast-food phenomenon was started in California by two brothers but now has its headquarters in Chicago, Illinois.”

The answer: “What is McDonald’s (MCD) with its Golden Arches.”

All three of these companies boast extraordinary brand equity and dominate their respective markets. But perhaps they all got cocky from their successes, because their market shares have slipped in recent years.

Not enough to lose their first-place statuses, mind you. But definitely enough to concern investors and analysts alike.

McDonald’s is a particularly interesting case because, as I’ve written before, it’s not just a hamburger company. While that’s what the Golden Arches are best known for, the company actually has a lot more going for it because of how it’s set up.

McDonald's story began in 1940 when Richard and Maurice McDonald opened a fast-food restaurant in San Bernardino, California. The business did very well with its highly efficient model that was, at the time, rather revolutionary.

Yet it wasn’t until Ray Kroc entered the picture years later that it began transforming into the international icon we know today.

Kroc, you see, hired Harry Sonneborn. And Sonneborn suggested that McDonald's either buy restaurant properties outright or secure long-term leases, then lease those locations to franchisees.

Today, 95% of McDonald’s restaurants worldwide work that way. And it’s a beautiful thing.

Under this system, the franchisee operates the restaurant, then pays the company royalties and rent. That’s why, even with its recent troubles, McDonald’s is one of the most predictable dividend machines America has ever produced.

So the company is very buyable in my book – just as long as it’s selling at the right price.

Under the standard McDonald’s franchise agreement, the franchisee pays:

Therefore, every time a customer pays for a Big Mac or McCafé iced coffee macchiato, corporate gets a cut twice over. And all while the franchisee supplies capital, pays workers, and manages food costs.

That's a beautiful business model for McDonald’s and its shareholders, resulting in $16.55 billion in revenue from its franchised restaurants alone last year.

As I’ve said before, McDonald’s is essentially the collections booth on its highway to fast-food profits. If you want to take that route, you need to pay the toll.

This can be very worthwhile for the franchisees, as evidenced by how many people have bought into the idea. But it’s even more worthwhile for McDonald’s itself.

The company reported around $22.8 billion of net property and equipment under franchise arrangements in 2025. That included $7.1 billion worth of land. And total long-lived assets – such as property, equipment, and lease right-of-use assets – were closing in on $44 billion.

In many cases, I’ve said that companies should unlock value by selling such land and leasing it back. But that’s not my recommendation with McDonald’s.

It gets too much out of ownership.

When a standard franchise agreement ends, typically after 20 years, McDonald’s has the power to re-sign – or not sign – with the existing operator, choose another tenant, or close the restaurant. It also gets to decide operating standards, décor and setup, technology investments…

And the ultimate customer experience along the way.

That setup has also allowed it to increase its dividend every single year for five decades now. As of just last month, it’s now an official dividend king.

This puts it on the same short and prestigious list of less than 60 other publicly traded U.S. companies such as Coca-Cola (KO), Johnson & Johnson (JNJ), Lowe’s (LOW), and Federal Realty (FRT).

With all that said, no company is flawless. And that shows in McDonald's second quarter, which was far short of spectacular.

Make that one more rough report since mid-2024.

Revenue rose 3.7% year over year to $7.10 billion. Global comparable sales gained a mere 1.3%. And U.S. comparable sales were even worse at 0.8%.

Management said some of that was due to execution issues regarding value offerings and promotions. And consumers are certainly under pressure.

However, it’s also true that McDonald's is increasingly fighting for traffic in an extremely competitive market.

All the same, non-GAAP (generally accepted accounting principles) diluted earnings per share (EPS) beat by $0.06 with a 6% increase to $3.38. Systemwide sales rose about 4% in constant currencies.

And McDonald’s repurchased enough shares during the quarter to reduce its weighted-average diluted share count by 0.9%. That's exactly the kind of business results I want to see during difficult environments like we’re experiencing now.

I also like to see a company that not only has the willingness but also the ability to support its operations in tough times. McDonald's is doing that through its recently introduced > NEXT framework: an enormous multi-year commitment to its franchisees.

Instead of just taking from them, it’s giving about $8.5 billion in partner support via rent relief and capital investments as it looks to improve restaurant-level efficiency by about 250 basis points (bps).

That’s just smart business. McDonald’s understands that its long-term success depends on its franchise’s long-term success. So it’s investing in the future.

Which is exactly what I’m seeking to do as well.

When I recommended McDonald's back in July on Seeking Alpha, shares were around $265. That means they were trading at about 21x expected 2026 earnings and yielding roughly 2.8%.

Today, that story has changed considerably though. MCD is now trading at around $231 and approximately 18.2x forward earnings to yield 3.2%.

That’s not normal for McDonald’s. Outside of a brief blip in 2020, the last time it traded under 19x was a decade ago.

Looking forward, estimates put its 2026 non-GAAP EPS payout ratio in the upper-50% range with a free cash flow payout ratio in the low-70% range. And analysts expect its non-GAAP EPS to grow to $12.92 in 2026, $13.96 in 2027, and $14.90 in 2028.

In that case, we’re looking at a reasonable runway for continued dividend growth – not to mention likely share price appreciation along the way.

As I always say – and as I already mentioned earlier in this same article – no company is perfect. And McDonald’s could continue struggling in upcoming quarters.

However, I do see it recovering in due time. It’s hard to think otherwise when it’s uniquely situated atop such an incredibly sophisticated economic machine.

Its franchisees, its royalties, rent, real estate, and globally recognized brand… They’re almost impossible to replicate: a wide moat supreme.

So I’m bypassing the naysayers today to buy the Golden Arches. This company – and its dividend – is a value combo I can’t say no to right now.

Happy SWAN Investing!

Brad Thomas,
Editor, Wide Moat Daily