Instead of Share Buybacks, McDonald's Could Just Buy Burger King and Wendy's

McDonald's (MCD 0.47%) CEO Don Thompson has gotten a lot of criticism for the company's lackluster sales growth. This Fool has been one of those critics, along with other analysts, customers, and franchisees. However, there is one thing that he is delivering -- and that's profits.

McDonald's is generating so much money that over the next three years, the company will return $18 billion to $20 billion to shareholders in the form of share buybacks and dividends.

Source: McDonald's

To put that into perspective, McDonald's could purchase both Burger King Worldwide (BKW.DL) and Wendy's (WEN 1.27%) for a total of only about $15 billion based on their combined enterprise value. Instead of doing share repurchases and buybacks, maybe McDonald's should just buy its competition and grow comparable sales that way? If there's no competition for McDonald's, there's no other major hamburger chain for customers to visit. In one move, McDonald's would own the No. 2 and No. 3 hamburger chains.

Source: thedailyeater.com

Where does the criticism start?
For this Fool, most of my criticism has been directed at Thompson's failure to grow comparable sales. It's not that he hasn't tried; it's just that nothing has worked. Over the last year, McDonald's has tried Mighty Wings, the McD app, and seasoned French fries. Furthermore, McDonald's has competed with Starbucks coffee drinkers, battled Taco Bell for breakfast customers, and faced a new burger war with Burger King.

Is the criticism warranted?
It's safe to say that McDonald's is operating in a much more challenging environment today. McDonald's isn't facing competition from just the burger chains but also other restaurants that offer healthier options. Because of this, McDonald's same-store sales have been weak. In April, U.S. same-store sales were flat. This is actually quite an improvement from the first quarter, when same-store sales fell 1.7% for the first three months of the year.

What's next for McDonald's?
At this year's Sanford C. Bernstein 30th Annual Strategic Decisions 2014 Conference, Thompson laid out his plan going forward. One thing that I really liked was that he said McDonald's core focus will revolve around the five key items that account for 40% of total sales; these are items like the Big Mac, Egg McMuffin, and McDonald's French Fries. After that, McDonald's will focus on improving customer service. This involves better staffing during peak hours.

Source: Smith Family McDonald's

In terms of store growth, the focus is on remodeling and more store openings. This year, McDonald's will remodel 1,000 restaurants worldwide. Between developed and emerging markets, the company plans to open 1,500 to 1,600 new restaurants. McDonald's also plans on expanding its McCafes and its food-delivery service.

An increase in refranchising initiatives
McDonald's is following the lead of other restaurant chains like Burger King and Wendy's and getting out of owning restaurants. The trend for many operators is to be a franchisor and allow the franchisees to own and operate the restaurants. This is an asset-light strategy that Wall Street particularly likes because it boosts margins and eliminates costly overhead.

Source: Wikimedia Commons

Over the next three years, McDonald's plans to increase its refranchising rate by more than 50%. McDonald's will refranchise more than 1,500 locations. This is where McDonald's will get some of the cash it'll return to shareholders. A good portion of McDonald's refranchising efforts will occur in Europe, Asia Pacific, the Middle East, and Africa. Here, about 70% of McDonald's locations are franchised compared to 89% of all locations in the U.S.

McDonald's remains a well-run business
What impresses me the most about McDonald's is the strength of its business and balance sheet. Last year, McDonald's generated $4.1 billion in free cash flow. This is the money a business generates that it can use to develop new products, make acquisitions, pay dividends, and reduce debt. To put all of this into perspective, here's how McDonald's compares with Burger King and Wendy's.

Source: Yahoo! Finance

Foolish final thoughts
While I don't think McDonald's will be buying its competition any time soon, it could easily do so. McDonald's remains one of the best-run businesses on the planet. This is great news for shareholders, and Thompson looks set to reward shareholders over the next few years. While McDonald's may no longer be a growth stock, it is certainly a deep-value stock for investors looking for dividends and share buybacks.