Dividend Analysis of 3 Restaurant Stocks

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Jun 20, 2014

In today's world of competitive fast food chains, investors need to keep a close eye oncompanies' dividend payments and yields if they are seeking regular income. This is trueregardless of whether the overall market is moving up or down.

Income under the golden arches

Certainly, McDonald's (

MCD, Financial) is known worldwide for its Big Mac and Egg McMuffins. But will this company's dividend be enough to keep shareholders happy in an income seeking environment? Chances are, the answer is a resounding yes.

With a per share dividend of $3.08, McDonald's is providing an annual dividend yield to itsinvestors of 3% -- which is quite respectable in comparison to some of its top competitors. Inaddition, this also compares nicely with other income options such as CDs, and both corporateand government bonds today.

After more than 27 years on the stock exchange -- and 37 years of paying dividends -- McDonald's is known as the world's largest publicly traded food chain, having in excess of 34,000 locations and nearly 2 million employees. Each day, this company serves customers in 199 different countries. Due to the high ranking brand recognition, McDonald's is the only restaurateur to obtain a spot on the Dow.

Over the past five years, McDonald's has provided a total return of more than 97% to its investors. Known for being a steady performer, the company also has a good reputation for managing its cash wisely.

One suggestion for pushing profits even higher is the offering of the chain's breakfast items all day long. With some of McDonald's toughest competitors beating them on this, the company may lose some of its late night bacon and egg lovers to other options such as Jack in the Box -- which has put a big push on its advertising of its all day breakfast menu.

Several years ago, McDonald's tried its hand at branching out with other types of food outlets such as Chipotle Mexican Grill. However, the company quickly sold a large percentage of its stake in that company in order to fully concentrate on its original brand.

Going forward, McDonald's looks to be a good choice for investors who are seeking both income and at least some growth. As the company is expected to generate more than $7 billion in operating cash flow this year, its dividend will remain steady for both the short and the long run.

Wendy's is also coming on strong

Wendy's (

WEN, Financial) is another big player in the fast food industry, operating more than 6,500 restaurants in both North America and internationally. Capitalizing on its tremendously successful "where's the beef" advertising campaign in the 1980s, this company has come on strong as a viable alternative to McDonald's and other quick service restaurants -- and helping to turn it into the third largest quick service hamburger company in the world.

The company recently announced that its CEO, Steve Hare, will be stepping down from his postin June and will be replaced by Todd Penegor, who currently serves as the President of theKellogg Company's United States Snacks Division.

Wendy's also announced earlier this year that it would be raising its quarterly dividend payment from $0.02 to $0.04 per share, essentially doubling it. While this company has been a steady dividend payer, the amount of its quarterly dividend payment has ranged anywhere between $0.02 and $0.17 per share over the years.

Wendy’s is also outperforming its peers with a much better balance sheet. Wendy’s has drastically reduced its debt levels over the last few years. It has a debt to equity ratio of 0.7, while McDonald’s floats much closer to 1 and Burger King has a weaker ratio of well over 2.

Due to the low share price of Wendy's stock, its yield is 2.70%, with a new dividend payment of $0.16 per share, per year. With this food chain, investors who seek income will likely be well rewarded.

Burger King's financials are great, but providing a not-so-royal dividend yield

While McDonald's and Wendy's are currently offering respectable dividend payments, Burger King Worldwide (

BKW, Financial) is lagging a bit behind -- although the company's most recent financials have been in line with analysts' expectations, even beating them in some areas.

Although this company's total revenue fell dramatically by more than 42% over the past year, thiswas due in large part to the adverse impact of its refranchising efforts and its correspondingdecline in sales. At the same time, though, its adjusted earnings per share rose substantially by49% in comparison to just one year ago.

Burger King has put a number of different strategies in place to increase its sales, including improvements in its menu items, its efficiency of operations, its overall marketing initiatives, and its re-imaging strategy in both the U.S. and Canada. In addition, the firm has also enjoyed a very strong performance in the Russian and U.K. markets, as well as with its "Trial Weeks" value promotions throughout its locations in Germany.

Presently, Burger King offers its shareholders a dividend payout of $0.24 per share, which equates to an annual dividend yield of 1.30%. The company also expects to generate significant improvement in the operating margin this year as the result of its refranchising efforts. Though, when compared to its peers, Burger King currently trades at a higher EV/EBITDA ratio of more than 14 times. Long-term investors would still do well to own at least some Burger King shares in their overall portfolio allocations.

The bottom line

All three of these companies will need to continue improving menu items in order to offer variety, as well as some differentiation, and in order to keep wooing customers. Continued growth in international markets will also be a big catalyst in keeping all of these food chains competitive.

Statistically, many dividend paying stocks outperform non-dividend-paying stocks over the long run. This typically occurs in both good and bad markets. Given this, investors who seek share price growth in the quick serve restaurant industry would do well to choose those companies that also offer steady dividend payouts.

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