The iconic McDonald’s Corp (NYSE: MCD) will raise its new restaurants’ royalty fees from 4% to 5% from next year onward, its first hike in three decades. This could affect its relationship with its new US franchisees, buyer of company-owned and the relocated restaurants.
Franchisees run almost 13,400 McDonald’s restaurants or about 95% around the US, as they carry all the costs such as rents, royalty and annual fees for MCD’s own mobile app services. In recent years, there were some issues between McDonald’s and its franchisees, like the new grading system which was disapproved by the workers, and a new California bill that will raise worker wage by 25% next year.
Meanwhile, US McDonald’s domestic same-store sales grew by 10.3% in the latest quarter as the Big Macs and Nuggets are still in high demand. Also, the company said that US operators’ average cash flows had grown by 35% over the last five years.
According to McDonald’s CFO, even with the record-breaking revenue from gross sales, its cash flow could not keep up with inflation as the owners are flowing less real-term money than 2010. The EBITDA per restaurant is likely to crash down to the lowest percentage of 12-year low at 12.25% in Q4 this year.
MCD stock is backed by its strong financials over the three decades as it’d been at least 100 times the initial public offering (IPO) price of $22.50 in 1965 to the current $272 per share, but only trading at P/E ratio of 25. This means the company could return the investor by 100 times if one just buys and holds MCD since 1980 or earlier.
MCD’s return is far exceeding the theoretical double after holding 25 years from the usual P/E interpretation. The current MCD price has doubled since 2017 and almost reached $300 in May of this year, while the pandemic low price is at $150.