The stock market might seem overwhelming to beginner investors, so it makes sense to employ a simple investing strategy. Investing in industry giants or market leaders is a good strategy as these companies enjoy a wide economic moat, which invariably results in steady earnings growth across market cycles.
Here are two industry giants beginner investors can consider buying right now.
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McDonald’s stock
Valued at a market cap of US$205 billion, McDonald’s (NYSE:MCD) is among the most recognizable brands globally. In 2023, system-wide sales for the fast-food giant rose 10% year over year to US$130 billion. However, there is a huge difference in system-wide sales and revenue for the company.
For instance, MCD has roughly 42,000 locations globally, and 95% of these outlets are franchised. As franchise sales are not included as revenue, McDonald’s top line number was closer to US$25.5 billion last year.
Alternatively, franchisees need to pay royalties, rent and franchise fees to McDonald’s, unlocking a high-margin revenue stream in the process. Typically, McDonald’s owns franchise properties, which are then leased out for a 20-year period, resulting in stable cash flows. In 2023, McDonald’s rental revenue totalled US$9.8 billion, an increase of 9% year over year.
McDonald’s also pays shareholders an annual dividend of US$6.68 per share, translating to a forward yield of 2.4%. These payouts have risen at an annual rate of 13% in the last two decades.
McDonald’s growth story is far from over, as it plans to open 9,000 locations while adding 100 million members to its loyalty program through 2027. It aims to grow the restaurant count by at least 4% annually and expects new locations to account for 2.5% of system-wide sales growth. The company will spend US$2.5 billion in capital expenditures this year as it aims to end 2027 with 50,000 locations.
Priced at 23 times forward earnings, MCD stock is reasonably valued and trades at a discount of 15% to consensus price target estimates.
Canadian Pacific Kansas City stock
Canadian Pacific Kansas City (TSX:CP) is the only single-line transnational railway linking Canada, the U.S., and Mexico. CPKC provides access to major ports in these three countries due to its rail network of 20,000 route miles.
In the fourth quarter (Q4) of 2023, CPKC reported adjusted earnings of $1.18 per share, an increase of 4% year over year. It ended Q4 with an operating ratio of 61.8%, an improvement of 220 basis points compared to the year-ago period. This ratio compares the total operating ratio to sales, and a lower ratio is favourable.
CPKC reported an operating cash flow of $1.3 billion and invested $700 million in capital expenditures, resulting in a free cash flow of $600 million. The company allocated $2.7 billion in capital expenditures last year, which should drive future cash flows higher.
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In 2023, its free cash flow totalled $2.2 billion while it paid shareholders dividends worth $708 million, indicating a payout ratio of less than 30%. A low payout ratio provides CPKC with the flexibility to reduce balance sheet debt and target accretive acquisitions.
CPKC expects its leverage ratio to move lower from 3.4 times in 2023 to 2.5 times by the end of this year.
