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State of The Burger: Top Fast Food Chains Compared

July 29, 2014 | About:


Source: Factsall

Nearly everyone in the US has eaten a fast food burger at one point or another in their lives. The ubiquity of fast food burger restaurants is a uniquely American aspect of life that came about in th 50’s and has evolved and gone global since that time.

This article examines the four major publicly traded fast food restaurants that pay dividends. The companies that fit this criteria are listed below.

  • McDonald’s (MCD)
  • The Wendy’s Company (WEN)
  • Jack In The Box (JACK)
  • Burger King Worldwide (BKW)
Each business current events and future growth prospects will be analyzed. In addition, each business will be compared to its peers and other businesses with a long history of dividend increases over several quantitative metrics from the 8 Rules of Dividend Investing, including growth rate, dividend yield, and volatility.

Before we delve into the current events and growth prospects of each company, it is important to get an idea of the scale of each of these four fast food hamburger restaurants.



Source: Sure Dividend

McDonald’s Current Events & Growth Prospects

McDonald's constant currency revenues grew 1% in the second quarter of 2014 versus 2nd quarter of 2013. Same store sales were flat in the period overall. McDonald’s US segment fared the worst of any of its geographic segments.

McDonald's comparable store sales decreased 1.5% in the US. It is the only hamburger franchise of the four analyzed in this article with negative US same store sales growth in its most recent quarter.

The company plans to turn negative US sales growth around by enhancing customer service, and focusing the menu on its core offerings. The McDonald's menu has substantial room for improvement as it is extremely cluttered and confusing to infrequent visitors (based on my personal experience).

McDonald's European restaurants saw comparable store sales decrease 1%. The company’s European division generates more revenue than the US division. Declining same store sales in Europe are similar to those in the company’s US division.

Sales in McDonald's Asia/Pacific, Middle East, and Africa (APMEA hereafter) region were the company's bright spot. Comparable store sales increased 1.1% due to strong growth in China. The APMEA region posted positive same store sales growth despite weakness in Japan.

Geographically, McDonald's is seeing its comparable store sales fall in the developed world. The US, Europe, and Japan all saw negative comparable store sales growth. McDonald's is performing much better in the developing world, however.

Comparable store sales are increasing in less developed markets. Developed market weakness is most likely temporary. McDonald’s was in a similar highly competitive market over the last decade and managed to increase same store sales substantially through innovation and improved store design. The company is not in a serious predicament, as it is still growing same store sales in emerging markets and generating very strong cash flows in developed markets. It is likely that management will find a way to turn around negative developed market same store sales growth over the next several quarters.

McDonald's announced plans to return between $18 billion and $20 billion to shareholders over the next three years, which is about a 6% annualized return at current prices. Even if McDonald's sees no organic growth for 3 years, and its valuation multiple does not change, shareholders will receive around 6% a year. The company's shareholder friendly attitude limits downside risk for investors in McDonald’s. Despite weakness in its two largest division, McDonald’s held revenue constant. The company is on track to grow store count about 3% a year. Even if McDonald’s cannot improve same store sales, and they remain flat, shareholders will still generate a 9% return from new store openings (3%), and dividends and share repurchases (6%).

Source: McDonald's 2nd Quarter Earnings Results

Wendy’s Current Events & Growth Prospects

Wendy’s posted positive same store sales growth for its most recent quarter. Company owned same store sales increased 1.3%, and franchised same store sales increased 0.6%. The difference is due to strong sales at Wendy’s Image Activation company owned stores.

Source: Wendy’s First Quarter Presentation

Total revenue was down over 13% percent for Wendy’s compared to the same quarter last year. The revenue loss is due to the company’s System Optimization plan which has divested 413 Wendy’s company owned stores to franchisees. In total, the company has generated $235 million from the divestitures. The company still generates revenue from its divested stores due to its franchise agreements. As a result, he company’s franchise revenue is up over 24% versus the same period last year.

The System Optimization plan has been successful so far, as the company’s EBITDA, Operating profits, and earnings per share are all up significantly versus the same period last year. The divestitures have created a more profitable company at Wendy’s by allowing experienced franchisees manage the company’s less profitable stores.

Source: Wendy’s News Release

Wendy’s is projecting 3% same store sales increases for the full year 2014. The company expects EBITDA growth in the 8% to 12% range, and earnings per share growth around 15%. The company’s strong growth is being fueled by better allocation of capital due to the company’s System Optimization plan, better sales and brand recognition from Wendy’s image activation stores, and increased total sales due to new store builds and store remodels. The company expects its dividend payments to grow in line with earnings per share growth.

Jack In The Box Current Events & Growth Prospects

Jack In The Box grew same store sales 0.7% in its most recent quarter at its namesake Jack In The Box restaurants. In addition to its 2,250 Jack In The Box stores, the company also operates 600 Qdoba restaurants. Qdoba same store sales increased 7% this quarter versus the same quarter last year.

Jack In The Box rewards its shareholders with strong share repurchases. The company has cannibalized about 5% of its market cap each year due to share repurchases.



Source: Jack In The Box Oppenheimer Presentation

In addition to its strong share repurchases, the company also recently announced a regular quarterly dividend of $0.20, which equates to a yield of about 1.4% at current prices.

Jack In The Box is investing heavily into its quickly growing Qdoba stores. For the full year 2014, the company expects to open 50 Qdoba stores and 10 new Jack In The Box stores. Overall, the company expects 1.5% to 2.5% same store sales increases at Jack In The Box stores, and 3% to 4% same store sales increases at Qdoba stores. The company’s earnings per share guidance shows an EPS gain of around 25% for the full year 2014 versus 2013.

Jack In The Box’s management is taking the strong cash flows from its established Jack In The Box restaurants and reinvesting them into Qdoba store growth, dividends, and share repurchases. This combination of efficient capital allocation will likely reward shareholders going forward.

Source: Jack In The Box 2nd Quarter Earnings Announcement

Burger King Current Events & Growth Prospects

Burger King is the 2nd largest fast food hamburger chain in the world, second only to McDonald’s. The company is nearly 100% franchised, has 13,677 restaurants worldwide, and serves over 2.3 billion customers each year. Burger King operates in 4 geographic divisions: US & Canada, EMEA (Europe, Middle East, Africa), LAC (Latin America & the Caribbean), and APAC (Asia Pacific).

Burger King’s first quarter results showed 2% same store sales growth worldwide. Same store sales growth by region was as follows:

  • US & Canada – 0.1%
  • EMEA – 4.8%
  • LAC – 4.0%
  • APAC – 3.8%
The highly competitive US & Canadian market grew same store sales the least. Burger King is taking its cash flows from US & Canada operations and reinvesting into its better performing international locations. The company actually reduced its US & Canada store count by 55 versus the same quarter one year ago, while still managing to grow overall revenue in the region by 0.1%. For comparison, Burger King opened 340 new restaurants in EMEA, 156 in LAC, and 235 in APAC over the last 12 months.

Burger King managed to grow organic constant currency revenue 6.9% for the most recent quarter as compared to the same quarter in 2013. The company’s future growth potential is from its international business. Burger King’s management is allocating most of its capital to international markets, as evidenced by its net reduction in store count in the US and significant increases overseas over the last 12 months. Burger King’s growth will be determined by how effectively it integrates to varying international tastes. The company’s positive same store sales growth in all its overseas markets shows Burger King is on the right track overseas.

Source: Burger King 1st Quarter Earnings Presentation

Valuation

The 1 year forward P/E ratio of each business analyzed in this article is shown below:

  • McDonald’s – 15.66 Forward P/E Ratio
  • Wendy’s – 20.94 Forward P/E Ratio
  • Jack In The Box – 21.19 Forward P/E Ratio
  • Burger King – 24.04 Forward P/E Ratio
McDonald’s is significantly cheaper than its peers based on the forward P/E ratio. The company is likely trading for a lower multiple due to recent same store sales weakness. It is a bit odd for McDonald’s to be priced so much lower than its peers despite its industry leading position in the fast food industry as measured by market cap, store count, revenue, and earnings.

Source: Finviz

Dividend History

McDonald’s has by far the longest dividend history of any of the stocks in this article, with 37 consecutive years of dividend increases. Burger King was brought public in 2012 after changing hands in several private equity transactions. The company has increased its dividend each year since 2012. Wendy’s began paying dividends in 2003. The company cut its dividend in 2008, and again in 2009. Since 2009, Wendy’s has increased its dividend each year. Jack In The Box began paying dividends this year, and is likely to increase dividend payments as earnings per share grow.

Why it matters: The Dividend Aristocrats (stocks with 25-plus years of rising dividends) have outperformed the S&P 500 over the last 10 years by 2.88 percentage points per year.

Source: S&P 500 Dividend Aristocrats Factsheet, February 28 2014, page 2

Dividend Yield

  • McDonald’s – 3.40%
  • Wendy’s – 2.42%
  • Jack In The Box – 0.69%
  • Burger King – 1.05%
McDonald’s has by far the largest dividend yield of the burger stocks. Wendy’s comes in second, followed by Burger King and Jack In The Box.

Why it Matters: Stocks with higher dividend yields have historically outperformed stocks with lower dividend yields. The highest-yielding quintile of stocks outperformed the lowest-yielding quintile by 1.76 percentage points per year from 1928 to 2013.

Source: [url="]Dividends%3A+A+Review+of+Historical+Returns[/url]

Payout Ratio

  • McDonald’s – 58.84%
  • Wendy’s – 57.14%
  • Jack In The Box – 17.02%
  • Burger King – 29.47%
Jack In The Box has the lowest payout ratio of the burger dividend stocks . Jack In The Box has the most room to increase its dividend payments faster than overall company growth, followed by Burger King. Wendy’s & McDonald’s both have fairly high payout ratios and are unlikely to increase dividend payments at a clip faster than overall business growth.

Why it Matters: High-yield, low-payout ratio stocks outperformed high-yield, high-payout ratio stocks by 8.2 percentage points per year from 1990 to 2006.

Source: High Yield, Low Payout by Barefoot, Patel, & Yao, page 3

Growth Rate

  • McDonald’s – 7.09% (10 year revenue per share growth)
  • Wendy’s – -0.89% (10 year cash flow per share growth)
  • Jack In The Box – -0.34% (10 year earnings per share growth)
  • Burger King – 6.00% (expected revenue per share growth)
Slightly different metrics for underlying growth in each business were used. Burger King in particular does not have a long history, so expected growth was used. Wendy’s and Jack In The Box have both changed their franchise to company owned restaurant fractions, which distorts revenue growth. Because of this, 10 year average growth in earnings per share or cash flow per share were used. Neither business had a long enough history of dividend growth to use dividend per share growth. Finally, McDonald’s growth was calculated as the lower of revenue per share or dividend per share growth.

Of the businesses above, McDonald’s has the highest and most consistent growth over the past decade. Its recent weakness is not likely to persist considering its dominant position in the fast food industry.

Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4 percentage points per year from 1972 to 2013.

Source: Rising Dividends Fund, Oppenheimer, page 4

Volatility

Volatility is calculated as the 10 year standard deviation of each stock.

  • McDonald’s – 20.14%
  • Wendy’s – 39.85%
  • Jack In The Box – 36.37%
  • Burger King – 21.70%
Again, McDonald’s wins this category. The company has the lowest standard deviation of all the dividend paying burger stocks over the last decade. Burger King has a low standard deviation as well. Jack In The Box and Wendy’s standard deviations are significantly higher than average for dividend paying businesses, reflecting their unstable earnings over the last decade.

Why it Matters: The S&P Low Volatility index outperformed the S&P 500 by 2 percentage points per year for the 20-year period ending September 30th, 2011.

Source: [url="]Low+%26amp%3B+Slow+Could+Win+the+Race%2C+page+3[/url]

Conclusion

McDonald’s is a Top 10 stock and the highest ranked burger stock based on the 8 Rules of Dividend Investing. The company has the highest dividend yield, lowest P/E ratio, lowest volatility, and fastest historical growth rate of the larger businesses in the hamburger fast food industry. Burger King would be ranked in the Top 20 due to its strong growth and low volatility if it had a sufficient dividend history to be included in the rankings.

About the author:

Sure Dividend
I run Sure Dividend, a website that finds high quality dividend stocks for long-term investors using the 8 Rules of Dividend Investing

Visit Sure Dividend's Website


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