Will McDonald’s Continue to Reward Investors?

McDonald’s has delivered for investors through the years. Is this trend sustainable in the current quick-service restaurant environment?

Jun 10, 2014 at 10:00AM



If you're the type of investor who has taken a long-term approach through the years, then it's likely that you have at least considered McDonald's (NYSE:MCD) for your portfolio. If you invested in McDonald's, then you have been treated well. For example, McDonald's repurchased 323.6 million shares between 2007 and 2013, it has raised its dividend every year since 1978, and its stock has appreciated 279.5% over the past 10 years. 

The dilemma here is that the quick-service restaurant landscape has changed, making it more difficult for the average investor to determine whether or not McDonald's should still be a quality long-term investment going forward.

Is it possible that the much smaller Burger King Worldwide (NYSE:BKW) now presents a better investment opportunity? Let's take a look at the most important metrics for McDonald's to determine if it's still likely to remain a better long-term investment than Burger King. 

Understanding McDonald's
Many people see those massive golden arches in every city and assume that McDonald's is a good investment due to brand strength. Believe it or not, they're half right. However, if you're going to lay your money down, then you need more guidance.

From an investment perspective, one of the greatest selling points for McDonald's is that it's primarily a franchisor. This keeps costs low while also allowing for more locally relevant experiences for customers. At the same time, approximately 18% of McDonald's restaurants are company-owned. This allows McDonald's to remain a credible franchisor while also developing and refining operating standards, marketing concepts, and pricing strategies. 

You likely already know that McDonald's operates around the world, but you might not know the weight of importance for each geographical region. At the end of the first quarter, 40% of the company's total revenue came from Europe, 31% from the United States, and 24% from APMEA (Asia Pacific, the Middle East, and Africa). If you're counting, that only adds up to 95%. The remaining 5% of total revenue comes from Latin America, Canada, and corporate activities. By being somewhat evenly spread out throughout the world, strength in one segment can offset weakness in another. This stabilizes cash flows, which then leads to investor smiles when those dividend checks roll in.  

Comps performance
Comps is a nickname for same-store sales. It measures sales at locations open more than one year. This excludes any new restaurant openings and is an excellent way to get a read on demand.

Global comps growth in the first quarter increased 0.5% year over year. Guest counts actually declined 3.1%, but a higher average check made up for this shortcoming. A moderate decline in traffic like this might make you nervous, but it's important to understand that this is how mature restaurants operate. Over the long haul, McDonald's will always aims to balance foot traffic and average check. As long as sales and profits increase over time, then all is well. If necessary, McDonald's can lower its prices to increase traffic. 

You shouldn't expect much improvement in comps performance this year due to increased competition, a hesitant consumer, and ongoing cost pressures. However, McDonald's should deliver respectable-to-good comps numbers over the long haul thanks to its significant marketing power, innovative menu items, limited-time offers, and an increasing presence in the coffee market. For a company the size of McDonald's, as long as comps are positive, investors should be pleased.   

unfortunately, McDonald's suffered a comps decline of 1.7% in the U.S. and Canada in the first quarter, citing negative guest counts, competition, and severe winter weather. Going forward, McDonald's aims to improve its comps performance by enhancing its breakfast experience, improving affordability, and introducing more limited-time offers.  

Increased competition and severe weather didn't faze Burger King as much in the first quarter. In its U.S./Canada segment, comps increased 0.1%. That's not much to get excited about, but Burger King also delivered global comps growth of 2%, and comps improved in all segments: U.S./Canada (0.1%), EMEA (4.8%), Latin America/Canada (4%), and APAC (3.8%). Much of this has to do with Burger King's successful limited-time offer campaigns. 

Comparatively, McDonald's saw comps increase 1.4% in Europe and 0.8% in APMEA. In Europe, McDonald's aims for improved value, new premium menu additions, more limited-time offers, the expansion of breakfast with a focus on coffee, modernization, drive-thru optimization, and new restaurant openings. In APMEA, McDonald's will focus on menu variety, increased convenience, and affordability. 

The Foolish bottom line
McDonald's is facing more competition now than before. But its brand strength, strategies to drive and balance long-term comps growth, and its commitment to modernization, delivering locally relevant customer experiences, limited-time offers, and constant menu alterations to determine what works best should lead to long-term rewards for shareholders. There might be some rough patches over the next year or two due to increased investments, but if history is an indicator, which it usually is, then these investments should pay off. 

If you're looking for more of a growth investment, then you might want to consider Burger King. It's delivering comps growth all over the world, and it has altered its strategy to focus on higher-quality products. At the same time, it's consistently delivering new innovative products. Burger King is also accelerating its net restaurant growth and strengthening its pipeline for sustainable growth. 

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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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