For years, Burger King has played second fiddle to McDonald's (MCD -1.01%), but parent company Restaurants Brand International (QSR -0.69%) looks poised to turn that narrative around by delivering better returns than McDonald's over the next five years.
Don't get me wrong. These are both great companies, and likely both pretty good stocks to buy and hold for the long term. But with its cheaper valuation, higher dividend yield, and longer runway for growth, Restaurant Brands could be ready to step out of the shadows and outperform its larger rival over the next five years.
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Great business models
Both of these stocks are winners. As franchisers, they have great business models and bring in steady, recurring revenue in the form of royalties from their franchisees. They also make money from up-front franchise fees when someone wants to open a new location. The franchise-based model is attractive because franchisees help the parent company grow by footing the bill to open new locations.
Restaurant Brands and McDonald's have both company-operated and franchised restaurants, but for each, franchises account for the vast majority of their footprint.
The two companies are well-positioned to deal with a challenging economy, serving affordable, reliable fast-food options that are unlikely to be cut from consumers' budgets even during a recession. Diners might also eat at McDonald's or Burger King more often during a recession in lieu of pricier restaurants.
Value menu
McDonald's has rewarded its investors with a return of over 200% over the past decade, while Restaurant Brands has underperformed that result with a return of 59% since the merger of Burger King and Tim Hortons that created the company in 2014.
But the market is forward looking. McDonald's now trades at a valuation of 34 times earnings and 27 times forward earnings, while Restaurant Brands trades at 22 times earnings and about 22.5 times next year's earnings. McDonald's certainly deserves a strong valuation thanks to the stock's strong track record over the years, but at this point, it is quite a bit more expensive than Restaurant Brands.
If you were acquiring either company, you could buy Restaurant Brands for the profits it generates in about 20 years, and if you wanted to buy McDonald's, you would be acquiring it for about three decades' worth of profits. Restaurant Brands' lower valuation makes it a more palatable stock today and leaves more room for upside in the future.
I'll have a large order of dividends
These are both solid dividend stocks that sport above-average yields when compared to the broader market. Shares of Restaurant Brands yield 3.2%, which trumps McDonald's 2.2% yield.
However, there's more to a dividend than just its yield, and McDonald's is a Dividend Aristocrat with an excellent track record, having raised its annual payout for 46 consecutive years.
Restaurant Brands has only been around since 2014, so while it has significantly increased its annual payout over the last eight years, it would be hard-pressed to match McDonald's long history of consistency.
Both companies' dividends also look safe based on their dividend payout ratios -- 56% for McDonald's and 62% for Restaurant Brands. McDonald's recently raised its quarterly payout from $1.38 per share to $1.52, and has grown its dividend at an annualized rate of 7% over the past five years.
Restaurant Brands has raised its dividend by a rate of about 4% over the same time frame. It ramped up its payout aggressively in 2018 and 2019, but the growth of its quarterly payout slowed to a trickle from $0.52 a share in 2020 to $0.53 in 2021 and $0.54 in 2022. The dividend growth should accelerate in the future as CEO Jose Cil has talked about paying "an industry-leading dividend" being a "key component" of the company's capital allocation strategy.
Restaurant Brands has a higher dividend yield and aspirations to ramp up dividend growth, but McDonald's also deserves credit for its long-standing commitment to its dividend and its faster dividend growth, so I'll chalk this one up as a draw.
Growth
McDonald's is an all-time great growth story, starting with a single burger joint in California in 1940 and evolving into a giant with over 40,000 locations worldwide. Restaurant Brands has 29,000 locations worldwide with its portfolio of brands: Burger King, Popeyes Louisiana Kitchen, Tim Hortons, and Firehouse Subs.
While both of these companies have massive footprints, Restaurant Brands' smaller store count means that it likely has more room to grow. Furthermore, newer acquisitions like Popeyes Louisiana Kitchen and Firehouse Subs are much smaller than Burger King or McDonald's, giving Restaurant Brands a longer overall growth runway. Popeyes now has has 3,928 locations while Firehouse Subs has just over 1,200 locations.
Looking ahead
In conclusion, McDonald's is a great stock that has rewarded its shareholders handsomely over the years. It will likely continue to provide solid returns in the form of dividends and capital appreciation for years to come. But overall, Restaurant Brands looks like it has more upside right now, thanks to its cheaper valuation, higher dividend yield, and longer runway for growth.
Further, Restaurant Brands has an additional catalyst in the hiring of former Domino's Pizza CEO Patrick Doyle as its new executive chairman. Doyle helped shepherd Domino's to a 2,200% gain during his eight-year tenure at the company, and will be motivated to create value for Restaurant Brands shareholders because he is forgoing a salary in exchange for a large compensation package that will reward him based on the stock price increasing over the next five years.
For these reasons, I think that Restaurant Brands edges out its longtime rival McDonald's over the next five years in total returns.
