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Better Buy: McDonald's vs. Restaurant Brands International

By Lawrence Rothman, CFA - Updated Mar 7, 2021 at 9:56AM

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While both have been hurt by the pandemic, one appears poised to regain its momentum.

There's no sugarcoating it -- restaurants had a tough time in 2020. It's no wonder, with governments forcing them to close their doors to the public and then putting restrictions on the number they could seat due to the pandemic.

However, investing in stocks is about looking ahead, and not in the rear-view mirror. Both McDonald's (MCD -0.41%) and Restaurant Brands International (QSR -0.06%) are major fast-food companies. But which one is better positioned to provide a better return?

A restaurant worker in the kitchen putting food on a plate.

Image source: Getty Images.

Rebuilding strong momentum

McDonald's is an established and still popular fast-food restaurant chain. What isn't as well known is the fact that it franchises most of them. It has agreements with over 36,500 restaurants, or 93% of its more than 39,000 locations.

This allows the company to collect an upfront fee plus an ongoing royalty fee based on the restaurant's sales. In many cases, McDonald's also owns the real estate and collects rent. There are several advantages to operating the business this way, including that franchisees are responsible for capital improvements and operating expenses.

Management's focus on the "3 D's," which are digital, delivery, and drive-thru, and menu innovations helped McDonald's results heading into 2020. Its 2019 same-store sales (comps) increased by 5.9%.

Fortunately, people started spending money at McDonald's as the year wore on, showing the appeal of its quick service and low prices. In the fourth quarter, while its comps fell by 1.3%, its U.S. comps rose by 5.5%. International locations dragged down sales as many governments still had a lot of restrictions in place. In the third quarter, comps fell by 2.2%.

There are reasons for optimism, including renewed momentum at its U.S. operations, expansion opportunities, and continued digital investments.

For dividend investors, McDonald's has raised its payout annually since its board of directors declared the first payment in 1976. Encouragingly, the company announced a 3% dividend increase last October, in the midst of the pandemic. Its dividend yield is 2.5%, adding to the stock's allure.

A mixed bag

Restaurant Brands International has company-owned and franchised restaurants across its Tim Hortons, Burger King, and Popeyes brands.

Some businesses are doing better than others, however. Its Tim Hortons business, known for its coffee, tea, and donuts, has been a laggard for some time, even before the pandemic. Weighed down by competition from the likes of Dunkin' Brands and McDonald's, it has had negative comps starting in the third quarter of 2019. Its comps were down 1.5% that year and 15.7% in 2020.

Its Burger King chain posted a respectable 3.4% comps increase in 2019. Last year, it was down by 7.9%. While COVID-19 restrictions hurt results, the business is not keeping up with competitors.

The one business that is doing well is Popeyes, with its inexpensive and popular fare, particularly the brand's chicken sandwiches. Its comps were up by 12.1% and 13.8% in 2019 and 2020, respectively. The business had a 5.8% comps decline in the fourth quarter, however. It was facing a tough 42% comparison, but it is worth keeping an eye on to see how it does amid stiffer competition with rivals, including McDonald's, stepping up.

It also has a history of annually increasing dividends, doing so for nine straight years. The latest action was last month, although it was just a penny raise to $0.53 a quarter. Restaurant Brands offers a 2.8% yield.

The decision

Restaurant Brands faces a tough road, and even its vaulted Popeyes chain is facing more intense competition.

Meanwhile, McDonald's continues to execute well by offering fast delivery and low prices while keeping ahead of the competition by constantly tinkering with the menu. That makes the stock the hands-down winner.

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Stocks Mentioned

McDonald's Corporation Stock Quote
McDonald's Corporation
$244.04 (-0.41%) $-1.00
Restaurant Brands International Inc. Stock Quote
Restaurant Brands International Inc.
$51.73 (-0.06%) $0.03

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