Prediction: Greg Abel Will Buy a Stock That Warren Buffett Spent Decades Passing On for This Simple Reason
Could Greg Abel bring McDonald's back to Berkshire? The Golden Arches still fit Buffett's investing blueprint almost perfectly.
Overview
Warren Buffett has never been shy about the great businesses he let slip through his fingers. One of the most painful was McDonald's (NYSE: MCD), which Berkshire Hathaway (NYSE: BRKB) (NYSE: BRKA) sold in the late 1990s in a move Buffett flatly called "a very big mistake." Berkshire has passed on the stock ever since. I think Greg Abel, Berkshire's new chief executive officer, will eventually buy it back, and the reason is simple: McDonald's is a textbook Berkshire business.
Forget the burgers for a moment. McDonald's is best understood as a real estate and royalty machine wearing a fast-food uniform. Roughly 95% of its restaurants are run by franchisees, which means McDonald's itself collects high-margin franchise fees and rent on prime real estate while its operators shoulder the day-to-day risk of running the restaurants. The result is capital-light, remarkably predictable cash flow, exactly the quality Buffett spent his career hunting for.
Details
Layer on the rest of the checklist and the fit is almost eerie. McDonald's owns one of the most recognized brands on earth, a genuine competitive moat. It has pricing power built over decades. It generates enormous free cash flow. And it has raised its dividend -- which yields about 2.8% -- for nearly 50 consecutive years. A wide moat, durable earnings, dependable and growing cash returns: This is the archetype of the kind of company Berkshire was built to own.
Source
Originally published at www.fool.com.