Want Fries With That Dividend ?

Investing In Fast Food Dividend Stocks

 

Love it or hate it, fast food is here to stay and stay in a big way. There’s no denying the convenience, variety and affordable nature of these fat laden, salty and tasty treats which is why, despite a lot of recent backlash in the industry, fast-food sales are expected to rise 4.9% from 2012 to $188.1 billion in 2013. Any way you look at it, this industry is huge. Couple this domestic growth with a growing middle class abroad hungry for a fast food hamburger or a bucket of chicken and you’ve got the making for an industry with a lot of runway ahead. Of course, the road to ever increasing sales always hits several bumps along the way namely from newly minted upstarts such as Chipotle Mexican Grill, Inc. (CMG), Noodles & Company (NDLS), El Pollo Loco Holdings, Inc. (LOCO) and The Habit Restaurants, Inc. (HABT) to name a few that all tout a healthier, fresher fare made to order and thus created a new category in the restaurant business known as ‘fast casual.’ For many years, these ‘fast casual’ restaurants experienced tremendous growth leaving behind the titans of the fast food industry to twist in the wind as a seemingly new era has dawned upon the restaurant world. Of course, food safety concerns recently in China did not help matters for the old guard fast food companies. However, in recent months it seems that investors are shunning the new ‘fast casual’ restaurants for the traditional fast food companies and it’s all being reflected in the performance of each of their respective stock prices. Old guard McDonald’s Corp. (MCD) is up 1% in a year which is not something to brag about but has climbed back to within a few dollars of its 52 week high from about $88 just four months ago. Yum! Brands, Inc. (YUM) is up about 30% in a year while The Wendy’s Company (WEN) is up about 40% in the same time and Jack in the Box Inc. (JACK) is up over 60%. Finally, Sonic Corp. (SONC) has improved over 50% as well. There are other names that are equally impressive but I’d like to focus specifically on the dividend paying fast food stocks. With that being said, let’s take an overview of the fast food restaurant dividend paying stocks.

 

Of course, when looking at this sector we must start with the granddaddy of them all, McDonald’s Corp. (MCD). If you live on Earth you know MCD and what they are all about. From a dividend perspective MCD is a stand out among the thousands of companies that publicly trade as it has been paying a growing dividend for almost four decades and has shown a great ability to adapt to the changing tastes of the consumer over time. While left for dead not that long ago, MCD has roared back with an impressive climb despite suffering from a food safety scare in China and low wage issues domestically. The stock currently yields a very healthy 3.42% with a moderately high payout ratio of 71.1% based on an EPS of 4.45. Of course, one of the most impressive metrics of MCD is its ten year annualized dividend growth rate of 19.50%. Just imagine your yield on cost if you held this stock for the last ten years. As I stated in my opening line, love it or hate it, fast food is here to stay. From a valuation perspective, MCD has a current PE of 22.3 which is well above its five year average and may make the stock appear to be a bit pricey at current levels. Forward PE looks a little better at 19.1.

 

If MCD is the granddaddy of the fast food world then not far behind is another company whose Taco Bell’s, Pizza Hut’s and KFC’s we are all familiar with, Yum! Brands, Inc. (YUM). Like MCD, YUM was left for dead, at least domestically, as consumer tastes shifted away from the fast food restaurants to the ‘fast casual’ choices. Of course, YUM which derives close to half of its total sales overseas has tremendous growth left in front of it primarily in the Chinese and Indian markets. In fact, Yum! Brands plans to invest $10 billion and have more than 20,000 restaurants in emerging markets by 2020. How’s that for future growth. As we know with tremendous growth comes a stock with a higher valuation and YUM is no exception. With a current PE of 41.6 this stock cannot be considered cheap by any means. But that’s usually how this game works… you pay up for future growth. Forward PE for YUM looks a lot more attractive at 23.3 putting in line with MCD. From a dividend perspective, YUM sports a diminutive yield at just 1.76% with a moderate payout ratio of 46.6% based on an EPS of 3.52. However, like MCD, YUM offers an amazing ten year annualized dividend growth rate of 31.28%. With a lot more international growth in front of YUM it certainly looks like the international operations will be spun off one day in my opinion.

 

Moving down the burger line we have another dividend paying stock, The Wendy’s Company (WEN). A familiar name owning and franchising its namesake restaurants, WEN also owns the Arby’s brand after a 2008 merger. Currently yielding a small 1.90% with a moderate payout ratio of 66.7% on an EPS of 0.33, WEN has experienced a pretty dramatic climb in just the last year. This, of course, gives WEN a fairly high current PE of 42.0 with a more attractive but also high forward PE of 30.2. The stock price has definitely climbed ahead of revenue here. While having to reduce its dividend payment back in 2008, no doubt because of costs associated with the Arby’s merger and sales issues, WEN has been on a path of raising its dividend for the last several years. In fact, the five year annualized dividend growth rate for WEN is an astounding 27.86%. Growth rates like these can help make up for the relatively low current yield one receives.

 

Another interesting fast food play that has been on fire is Jack in the Box Inc. (JACK). I actually used to own Jack in the Box back in the early 90s when the company was called Foodmaker, Inc. (FM). I had bought the stock after a 1993 E. coli outbreak occurred and 732 people were infected. As you can imagine the stock tanked and like every investment decision I make I ask myself if is this simply a broken stock or a broken company and because of this unfortunate incident I had decided that it was simply a broken stock and that Jack in the Box would eventually rebound from this public relations disaster. In recent times, one might say the same thing happened with Johnson & Johnson (JNJ) and its Tylenol recalls or with the tragic loss of life and pollution that resulted from the BP p.l.c. (BP) gulf spill. In both cases, stock prices rebounded nicely from their lows after these incidents. This begs the question of Is It Wise To Buy Stock After A Catastrophic Event? In many cases, the answer is ‘yes.’ Back to JACK and its current 1.36% yield and its moderate 40.3% payout ratio based on an EPS of 2.98. This stock, while experiencing a nice growth rate in terms of capital appreciation, does not have a very long dividend history having only started distributions in 2014. For my investment dollars and from a dividend perspective Id’ like a little longer history before jumping into this one.

 

Finally, as an honorable mention, and a new dividend payer like JACK, we have Sonic Corp. (SONC). Headquartered in Oklahoma City, OK, SONC operates over 3,500 restaurants in 44 states so there may be some of you out there who have never heard of this fast food chain. Having started dividend payments in 2014, SONC offers us a current yield of 1.16% with a low payout ratio of just 18.6% based on an EPS of 0.96. From a valuation perspective SONC has a current PE of 32.1 well above its five year average of 25.0. Forward PE is more in line with its five year average which suggests, as with other stocks mentioned in this post that share price has run up quite a bit in recent time. As with JACK, I’d like a longer dividend history before buying this stock.

 

Do you own any fast food dividend stocks in your portfolio? What do you think about the adaptive capabilities of some of the old guard fast food chains to compete in this ever changing sector? Please let me know below.

 

Disclosure: Long MCD, YUM, JNJ

Image courtesy of: Sira Anamwong at FreeDigitalPhotos.net

44 thoughts on “Want Fries With That Dividend ?

  1. Hi Keith,
    We have shares of MCD and CMG. MCD is 1.46% of our portfolio, but CMG is just a token amount. We bought 10 shares of CMG for something less than $500 and sold half of them for $700, leaving 5 shares with a cost basis of $294 each. I only bought CMG to get my youngest daughter interested in investing since it’s her favorite restaurant, but after reviewing the data, figured it was probably a solid company even if the stock is a bit pricey. No plans to sell the 5 shares and could add more if CMG stock comes down. A P/E of 25 would be an excellent buy if sales keep climbing.

    We all know about MCD’s recent troubles. To be honest, we never eat there. The last burger joint we ate at was Smash Burger (very good but expensive, and the Smash fries are excellent). We keep the MCD stock for the dividend, but sometimes I think I should just sell and move the money into something else. A 3.4% dividend is enough to keep the money there for now.

    I hope you find something tasty to invest in.
    KeithX

    • Hi KeithX,

      For many years CMG has been a great stock to hold. The growth and expansion of that brand has been nothing short of phenomenal. I’m happy to hear that your token buy has worked out for you in two ways. First, being able to realize a profit and of course, teaching your daughter about investing and stocks. What better way to engage a young mind than to invest in what they know. Regarding MCD, I think it will find its footing once again as it has done many times in the past. No path to growth is ever smooth. The reality though is that I would love to add to my YUM as it seems that growth and sales are growing like gangbusters in India and China. Of course, with a very rich PE, because of all this growth no doubt, and relatively low yield, I’d probably wait to pull the trigger on it. MCD, as you mentioned, is still a great hold with that nice current yield. I fully concur on that. Thank you for stopping by and commenting.

  2. I have consider MCD. I think they have done decent job changing with the times and staying competitive. I do own Dunkin Donuts (DNKN) which is somewhat fast food. They do offer a lot of food choices now. They yield almost 2%. I have been happy with their price appreciation and dividend increases over the years.
    Financial Forager recently posted…Foraging and Preserving Wild AsparagusMy Profile

    • Hi FF,

      I know many out there think that MCD is done. It’s an old guard company that is out of touch with its consumers and offers low quality food choices. But, I happen to disagree with that sentiment as over the decades MCD has proven its ability to adapt. It may take time but MCD always addresses the concerns of the day from changing menu items and to how food is packaged. I think if “Ray” Kroc was alive today he wouldn’t believe that his beloved MCD, a burger restaurant, now serves yogurt, fruit, wraps, various coffee drinks and even bakes cakes. In other words, MCD knows how to change with the times. Thank you for stopping by and sharing your own DNKN food holdings.

    • Hi FV,

      Thank you for your kind words. It wasn’t that long ago that MCD was pretty beaten up going from about $103 to $88 in about a three month time span. It was around the time a new CEO was named and every investor was in love with any ‘fast casual’ stock that was trading. How quickly things turn around as fast food is back en-vogue. MCD still trades at a pretty decent value even though it has climbed quite a bit and has a pretty nice current yield too but I have to agree with your YUM assessment. It really seems like it has the most runway in front of it with a lot more expansion planned in India and China. Thank you for sharing your thoughts.

    • Hi DE,

      Glad you enjoyed this overview. I think it’s great that you are slowly accumulating MCD stock in your Loyal3 account. I would like to add to my YUM position but not at current levels. I still think that one day YUM will spin off its international division as it continues to grow and become a larger portion of the company’s overall revenue. I see it as a similar situation when KFT spun off KRFT (low growth domestic food business) and MDLZ (the high growth international snack food business). As always, I appreciate your comment.

  3. I don’t own any of the mentioned stocks; however, I have seen the financial statements of a Franchise owner of MCD, and the consistency between stores when it came to margins was incredible. They really have their system down.

    I will admit, if I ever do eat out, it’s typically at the “fast casual” places such as Noodles or Chipotle, but I’m not as familiar with their history. For that reason, MCD is the only one on the watchlist.
    Red to Riches recently posted…Book Review: The Dividend Mantra WayMy Profile

    • Hi RtR,

      There’s little doubt about how MCD runs its operations. I’m sure after seeing those financial statements you could tell that MCD was something like an engineered machine. From a dividend perspective though, you have to give credit to MCD for its consistency as well as longevity at returning cash to shareholders. Even though, over the decades, it has faced serious headwinds from input costs, to health issues, to wage issues, to new competition from the ‘fast casual’ restaurants MCD seems to adapt. Thank you for stopping by and commenting.

  4. I don’t really understand the fast food industry, which is why I don’t invest in it. I don’t really understand why McDonalds’ sales have been declining as of late. Sure, the food is unhealthy, but haven’t consumers always known that? And why is Chipotle so popular all of a sudden? I don’t really get it.

    • Hi IT,

      It’s always best to invest in what you understand and if you don’t feel comfortable in a particular sector or company then don’t put any of your hard earned dollars into it. It’s always been said that the tastes of consumers are fickle and one must continually adapt towards new trends without disrupting the old way of doing business. I totally agree with you that MCD’s food offerings has never been known to be healthy yet they always managed to grow their business in various economic climates and trending consumer tastes. There’s no denying that convenience and relative affordability has kept MCD afloat all these decades. Will CMG continue its climb up? Will MCD perform yet another turnaround? Time will tell. Thank you for stopping by and commenting.

  5. YUM is a solid all-round company. I’m up 30% since owning it.

    I own MCD too and I think they will do good. Nothing to fear.

    • Hi StM,

      I happen to like YUM a lot too and think it has a lot more international growth in front of it. I still believe that one day we will see a YUM spin off of its India/China business as it grows much larger than its domestic earnings. MCD at least pays a very healthy and sustainable dividend while we wait for that turnaround and I agree there’s nothing to fear at this point. Thanks for commenting.

  6. I wish the fast food companies weren’t so expensive. I own MCD and YUM and wouldn’t be opposed to buying more. Especially MCD, I can’t imagine that its current issues are anything more than short term problems that will work itself out. Even a health conscious consumer base that likes “fast casual” can be swayed to a well known company if said business caters to their wants. A menu that has plenty of healthy alternatives and burgers and fries that are higher quality than what they have now can turn the tide back in their favor. The executive team at MCD should take a couple trips to Five Guys Burgers And Fries on the East Coast and In’N’Out Burger on the West Coast to see how things should be done.

    The only real long term problem that MCD (and the other fast food companies, but mainly MCD) face, in my opinion, is the negative reputation associated with the name. People think of low quality processed meat-like substances instead of real beef when a McDonald’s hamburger is brought up, and minimum wage dead end jobs in all parts of the service industries earned the nickname “McJobs” until Walmart became the poster child for those. More than anything else, those negative connotations are the long term challenges I think MCD needs to overcome. Ditto with YUM and the rest, but MCD more than any of the others.

    Hopefully they (MCD and YUM, the two that I own) will continue to grow overseas.

    Sincerely,
    ARB–Angry Retail Banker
    ARB recently posted…I Swear Someone’s About To Get SlappedMy Profile

    • Hi ARB,

      Well said. I happen to agree that any issues related to MCD and YUM are short term. Besides people have very short memories as evidenced by the recent China tainted food scare. Both MCD and YUM have been up a lot since that news broke and it just goes to show that these behemoths have the resources to contain any damaging press and simply move on. I have commented elsewhere at how MCD continues to adapt in the face of changing consumer tastes as well as environmental pressures. I remember a time when an MCD burger was packaged in Styrofoam. I remember a company that grew domestically too fast a little over a decade ago and cannibalized sales while seeing a stock price somewhere in the low teens. Even with its perceived image and reputation MCD and YUM for that matter continue to shift their energies and focus to drive sales further. I’ll continue to hold both MCD and YUM in my long term portfolio. With MCD I figure there is a nice sustainable current yield to offset any near term pain while a long runway of growth is still in front of YUM China/India which I think will be spun off eventually. Thank you for stopping by and commenting.

  7. I totally agree with so many others here that MCD will do great in the long term. Fast food will stay. MCD just need to be tweaked a bit. Thanks for great article.

    Cheers!

    BeSmartRich

    • Hi BSR,

      I still am surprised at far MCD has come in just the last year. While up only 1% or so year over year it has climbed back quite a bit from its recent lows. I also think that MCD will adapt and change to satisfy new consumer tastes and that fast food will be with us for a long, long time… just, as you said, tweaked. Thank you for stopping by and commenting.

  8. Lots of people are hating on MCD and I cant blame them, lots of negative article are written but I can see that MCD will be a good long term holding.

    Peoples preference are changing and they are more conscious with their health nowadays, customers are moving on fast casual dining experience leaving the fast food industry behind. But MCD is different, they operate in prime location and has brand, they are not just a restaurant but a real estate business. I am sure that MCD will survive the current headwind and the next recession and the next after that. What I am not sure is if the other newer company will.
    FrugalityToFinancialFreedom recently posted…Stock purchase – May 2015My Profile

    • Hi FTFF,

      I found that this article was timely as it demonstrated that many investors have fled the ‘fast casual’ stocks and jumped on board the traditional fast food bandwagon. The way I see all of this is a simple ebb and flow of what’s hot and what’s not. I fully agree that long term the traditional fast food companies will be here to stay. As I mentioned in another comment you can see how much MCD has changed over the decades with menu offerings and packaging changes. Taco Bell now serves breakfast. The old guard fast food companies will find their footing once again and at least with MCD you will be getting a healthy yield while you wait and with YUM you’ll get tremendous growth in China and India. Thank you for stopping by and sharing your thoughts.

  9. Hi Divhut,

    Everybody is talking about MCD… Some love it. Some hate it. But they talk about it and that’s what’s important. They are facing a lot of challenges but MCD is still an incredible cash machine in any weather. I personaly have faith in that company and it is currently my biggest holding which testifies that I think it is just headwinds that they will eventually overcome. I might be right or wrong but since I bought my shares I’ve been happy with the dividends and dividend raises. Plus, they have a solid buyback plan in place to protect our capital and they are taking measures to turn things around.

    My shares are only up 3,8% as of today. But factor in the dividend and you get a healthy total return.

    As per Yum… well it’s too expensive for me right now but I would consider initiating a position if the price goes back to better territories. There’s too much not guaranteed future growth factored in right now.

    Cheers
    Allan recently posted…Rich man quote from the movie “The gambler” – Put yourself at a level of F*** you!My Profile

    • Hi Allan,

      You seem to have a cool, level headed attitude regarding MCD and can recognize that a lot of the issues facing the company seem to be short term pain and that they will be able to adapt to changing consumer tastes as well as other issues. As you mentioned, the nice current yield helps take some of the near term sting out of any price decline. YUM is also a great stock to own in the fast food space but I do agree that share price has jumped way too far ahead of earnings. Even though there is a lot of future growth ahead of YUM, the value of the stock does seem to be a bit rich. Thank you for stopping by and commenting.

  10. You gotta love MCD. I’m very curious as to the success of Easterbrook’s turnaround. I think more transparent sourcing will go a long way in improving the current perception of McDonalds. I love Starbucks and Texas Roadhouse (TXRH not necessarily fast food, though).

    All three represent solid dividend growth opportunities.

    Eric

    • Hi R29,

      It’s way too early to see any of the effects of MCD’s turnaround initiatives but I have a feeling that it will be positive for the company. This isn’t the first time MCD has faltered and even though the ‘fast casual’ restaurants took a lot of the glory away from the traditional fast food companies in recent years it seems like investors want back into the old guard facilities and traditional fast food stocks have climbed nicely in just the last year. Thank you for stopping by and sharing your restaurant holdings.

  11. Nice read. Interesting to note the dividend yields versus those which I see in my home markets of Australia. We have a slightly different tax environment which includes franking credits but many of the big name dividend plays (mainly the big Australian banks such as CBA can yield above 5% and often as high as 7% or 8%. Obviously added risks such as FX if you’re looking to invest from an american perspective, but worth looking into at least.
    Sam from The Nude Investor recently posted…Portfolio Update – Week ending 22/05/15My Profile

    • Hi TNI,

      You are 100% correct in stating that looking into foreign plays might be well advised. This is why I hold, UL, DEO, IR, ALLE and three Canadian banks, TD, BNS and RY as those juicy yields and tax breaks, if held in a retirement account, are too good to pass up. I never considered any of the big Australian banks as pretty much every North American blogger holds North American banks in their portfolios but it’s good to know there are some high yield plays there as well. Thank you for stopping by and commenting.

  12. Hey DH,
    Nice write-up of the well known fast food industries. Wasn’t familiar with YUM although I saw them as a competing stock to Wendy’s when I researched them. Finding some of these stocks close to their 52 week highs has me a bit turned off from a buying point of view. Hope you had a good weekend!
    -Rich (27)
    Redeemed Finance recently posted…Memorial Day Weekend NYCMy Profile

    • Hi RF,

      Glad you enjoyed this overview. I think it’s important to note that even though many have written off the traditional fast food companies as being past their prime, as the ‘fast casual’ restaurants took greater market share, they still have tremendous pricing power and the ability to adapt to changing consumer tastes. As you can see this is reflected in their impressive performance during the last year. I’m still liking YUM a lot though I would wait for a little pull back. They do have a lot of future growth planned for China and India which will help overall sales figures for the next decade. Thank you for stopping by and commenting.

  13. I didn’t even know about Jack in the box! Not really interested in the fundamentals they now show, but it’s always nice to hear new names and to know a little more about them!

    I used to own shared of MCD but I sold them about a year ago when I thought the growth of the company was not meeting my standards anymore. It is still a good dividend to hold, but I thought my money would be more efficient elsewhere.

    Enjoyed the post!

    Cheers,

    Mike

    • Hi DG,

      JACK has been a west coast staple for several decades and they are now expanding throughout much of the United States. They have performed really well over the last several years and have a pretty safe dividend as well that has room for future growth. In my portfolio I just stick to MCD and YUM. Regarding MCD, about a year ago is when they really started faltering and every investor was flocking to the new ‘fast casual’ category restaurants as many left the traditional fast food companies for dead. The truth is I’m not as confident in the future growth of MCD when compared to YUM but that nice current yield kind of makes up for that. Glad you enjoyed the post. As always, I appreciate your comment.

    • Hi TP,

      Your comment highlights the very important, and often overlooked, power of dividends. Now just imagine a rising dividend being paid out for multiple decades along with a rising stock price and you’ll truly see the power of long term dividend growth as well as creating an ever growing passive income stream. Thank you for stopping by and commenting.

    • Hi NNL,

      That’s the beauty of all our blogs as we share and learn from one another and see all the different manners of investment preference. I know that there is a long standing argument over what’s the best way to invest long term, whether it’s via ETFs, mutual funds and the like, or individual stocks. I happen to prefer building my own portfolio of individual stocks thereby creating my own fund or sorts but I don’t get upset when others tell me that they like to use low cost ETFs. I have considered DVY a long time ago but to tell you the truth I am starting to look at two high yielding mREIT funds that may be interesting picks, MORT and REM. These high yield funds might take some of the guesswork about choosing a specific mREIT. Thank you for stopping by and commenting.

  14. I’ve been watching MCD pretty closely. Once they bottom out I think it will be a fantastic opportunity. Mgmt is still flailing around for easy fixes, so I don’t think the time is quite right. They need some pretty big changes to right the ship, once they acknowledge that I’ll be buying big time!

    • Hi superspyguy,

      We all know that MCD is having its share of issues these days but it still is the 800 lb. gorilla in the fast food business and has tremendous pricing power as well as the ability to adapt to changing consumer tastes. Not sure when MCD will “bottom out” but what I am sure of is a nice current yield well north of 3% that is nice to receive while you wait for the turnaround to occur. Thank you for stopping by and commenting.

  15. DH,

    I’m Long MCD and YUM. I bought them both during the Chinese meat supplier scandal last year. YUM is up considerably (+20%) while MCD is up marginally. It was one of those short-term problems which represent opportunities for long-term investors. I was hoping to grab more of YUM in the high $60s while I would have grabbed more MCD in the mid-to-high $80s.

    Fast food is something people love to gripe about despite the fact that virtually everyone eats it. The same people who complain about MCD will laud the taste of a Five Guys or other such burger joint without seeing the hypocrisy of their position.

    Take care,
    – Ryan from GRB
    Get Rich Brothers recently posted…Book Review: The Millionaire MindMy Profile

    • Hi GRB,

      It’s all about short term headwinds that give us better buying opportunities. While MCD is up only a little since that meat crisis, it is up considerably from its low last summer. Like you, I am long both MCD and YUM and plan to keep both for the foreseeable future. As you stated, fast food is always a target, for health concerns, environmental impacts, wage and finance issues, but the reality is that everyone eats it at some time in their life and there’s no denying the brand power and economies of scale these two companies possess. Plus, at least with YUM, there is a huge growing presence in emerging Asian markets which should bode well for the stock for years to come. Thank you for stopping by and commenting.

  16. I really worry about the old school fast food options. It really feels like they aren’t keeping up with the “healthier” trends that happening in America. MCD is priced with the idea that it will always grow over the long term…but what if it doesn’t? A couple of quarters of shrinkage and you may seem people running

    • Hi Evan,

      There’s no doubt that near term challenges are in front of the major fast food chains as shifts in consumer tastes have affected sales. I do feel that these behemoths in their respective sector can adapt and change to meet new consumer tastes and trends accordingly though. It’s been done in the past and can be done going forward. Other fast food plays, like YUM for instance, have great growth prospects outside the U.S. still in front of them as China and India present a great growth potential in the coming years. Time will tell of course as to how these fast food companies can handle these challenges. Thank you for stopping by and commenting.

    • Hi DC,

      I always say, if it’s a broken stock you are dealing with, it’s a good time to buy. A broken company, on the other hand, is not. We’ve seen bad quarterly reports, poisoning, deaths, etc. from some of the best names around. It’s unfortunate that these events had to happen but they each did not fundamentally change the company. Thank you for commenting.

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