Stock Story: McDonalds

Stock Story: McDonalds

June 2022

McDonald’s opened its first restaurant in 1948 and has since become one of the most recognisable brands in the world. The iconic golden arches were designed to draw attention to the company’s pioneering ‘Speedee Service System’ that allowed McDonald’s to serve its customers at speed, at lower cost and with consistent quality. It is this ‘Quick Service Restaurant’ design that enabled McDonald’s to franchise. The company’s reach has expanded to 36,000 restaurants in more than 100 countries that serve 63 million customers every day.

Given its size, McDonald’s is exposed to numerous environmental, social and governance risks and opportunities, particularly in relation to the supply chain and labour management. It is important that these ESG risks are managed, to limit any threat to the company’s cash flows and valuation. Communication of risks and how the company is mitigating them is crucial because transparency enables investors to better understand these risks. Key risks and opportunities for McDonald’s include:

  • Labour. McDonald’s is one of the largest employers in the US. Staff are vital as customer service is essential to operations. Consideration for diversity, equity and inclusion are important to culture, business continuity and brand.
  • Health and wellness. McDonald’s needs to ensure the items on its menu meet the changing demands of customers including their quest for healthy eating.
  • Climate change. According to the UN Intergovernmental Panel on Climate Change, the global food system is responsible for 21% to 37% of global greenhouse gas emissions. Cattle are the largest contributors due to the methane they give off and land clearing for grazing. Investing in sustainable farming techniques is an important step to reducing emissions and lowering vulnerability to climate change for McDonald’s.
  • Raw material sourcing (including animal welfare). Improving the sustainability of sourcing reduces the environmental damage from operations. Importantly too is that this is the ethical path.
  • The ‘circular economy’. The term, which extends to natural resources, refers to the long-term sustainability of society, where there is less waste and more recycling of waste. Given the reliance of McDonald’s on natural resources for packaging and food, it is important that management implement strategies to reduce waste and increase recyclability.
  • Governance. It is important for all companies to operate ethically and in the best interests of shareholders.

As the world’s largest restaurant chain, McDonald’s attracts much attention from the media and investors. The McDonald’s annual general meeting this year was no exception. Prominent activist investor Carl Icahn contested some of the proposals subject to shareholder voting at the meeting held in May. A contested ballot is uncommon. Less than 1% of Magellan’s investments were subject to a contested ballot in fiscal 2022.[1] Contested ballots can be a distraction to management, but they can be a reminder that communication is critical to risk management.

At this year’s annual meeting, Icahn called for McDonald’s management to focus more on sustainability. He requested two seats on the board to drive this change and submitted a shareholder proposal on sow gestation stalls – animal-rights activists say they are too small for pregnant pigs. Icahn had a tiny holding (just 200 shares) yet wanted director representation vastly greater than this ownership stake and out of proportion relative to McDonald’s risks. 

McDonald’s management improved disclosure ahead of the meeting. Specifically, McDonald’s provided much greater disclosure related to the activist investor’s shareholder proposal on sow stalls. McDonald’s outlined its collaboration with industry, its targets related to sow stalls, supply  challenges due to covid 19 and progress to date. Although Icahn’s proposal was voted down, it resulted in improved transparency, which is a good outcome for the industry.

The episode highlights that ESG risk management is important to asset owners. It is a reminder to asset owners that their vote matters and that asset owners can influence management. At Magellan, we value our right to vote. In this example, we reviewed the proposals, discussed the evidence, engaged with management and encouraged better communication. We concluded that McDonald’s is managing the risk and this issue is of limited consequence to the investment case.

Sources: Company filings

 

Important Information: This material has been delivered to you by Magellan Asset Management Limited ABN 31 120 593 946 AFS Licence No. 304 301 (‘Magellan’) and has been prepared for general information purposes only and must not be construed as investment advice or as an investment recommendation.  This material does not take into account your investment objectives, financial situation or particular needs. This material does not constitute an offer or inducement to engage in an investment activity nor does it form part of any offer documentation, offer or invitation to purchase, sell or subscribe for interests in any type of investment product or service. You should obtain and consider the relevant Product Disclosure Statement (‘PDS’) and Target Market Determination (‘TMD’) and consider obtaining professional investment advice tailored to your specific circumstances before making a decision about whether to acquire, or continue to hold, the relevant financial product. A copy of the relevant PDS and TMD relating to a Magellan financial product may be obtained by calling +61 2 9235 4888 or by visiting www.magellangroup.com.au.

Past performance is not necessarily indicative of future results and no person guarantees the future performance of any financial product or service, the amount or timing of any return from it, that asset allocations will be met, that it will be able to implement its investment strategy or that its investment objectives will be achieved. This material may contain ‘forward-looking statements’. Actual events or results or the actual performance of a Magellan financial product or service may differ materially from those reflected or contemplated in such forward-looking statements.

This material may include data, research and other information from third party sources. Magellan makes no guarantee that such information is accurate, complete or timely and does not provide any warranties regarding results obtained from its use. This information is subject to change at any time and no person has any responsibility to update any of the information provided in this material.  Statements contained in this material that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of Magellan. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. No representation or warranty is made with respect to the accuracy or completeness of any of the information contained in this material. Magellan will not be responsible or liable for any losses arising from your use or reliance upon any part of the information contained in this material.

Any third party trademarks contained herein are the property of their respective owners and Magellan claims no ownership in, nor any affiliation with, such trademarks.   Any third party trademarks that appear in this material are used for information purposes and only to identify the company names or brands of their respective owners. No affiliation, sponsorship or endorsement should be inferred from the use of these trademarks. This material and the information contained within it may not be reproduced, or disclosed, in whole or in part, without the prior written consent of Magellan.

Insights direct to your inbox

Make sense of the global investment landscape with timely updates, articles and videos from our investment experts.

Enter your first name
Enter your last name
Provide a valid email address
Provide a valid postcode
Select type of investor