McDonald’s thrives in emerging markets

The Big Three global fast-food chains are all of one mind when it comes to growth.

McDonald’s (NYSE: MCD), Yum! Brands (NYSE: YUM) and Restaurants Brands International (TSX, NYSE: QSR) are all betting on emerging markets and investing in artificial intelligence software to learn more about their customers’ habits. All three are aligning themselves with mobile delivery players and experimenting with non-meat fare.

Investors like what they are doing and all three stocks hits highs this summer. The share prices have retreated, but the fundamentals are still good. Each offers a slightly different opportunity, but all are worth a look for their well-established businesses, global brand power, and a history of dividend and share price growth. Of the three, McDonald’s has the longest track record of profits and dividend growth.

Restaurant Brands shares have been the best performer this year with a 19.9% gain as of the time of writing. Next is McDonald’s at 9.5%, with Yum at 9.2%. RBI has the best dividend yield. All three have increased their dividend payment.

McDonald’s (#1) and Yum (#2), which owns Kentucky Fried Chicken, Taco Bell, and Pizza Hut, have been cultivating an emerging market connection for decades.  Today, McDonald’s has 44% of its stores in Asia, or other emerging and high growth markets. China is the second biggest market for Yum’s KFC after the U.S. Restaurant Brands International (#3), which is based in Brazil, started with Burger King and Tim Hortons in 2014 and recently acquired Popeyes Louisiana Kitchen. Some 60% of RBI’s sales (#3) are outside the U.S. and Canada.

We take a closer look at all three this week, starting with McDonald’s.

Background: McDonald’s is the world’s largest operator of fast-food restaurants with more than 37,000 outlets in 120 countries. The U.S. is the largest single market, though emerging markets are increasingly driving sales and profits. McDonald’s plans to double its Chinese outlets by 2022, at which time China will surpass Japan as its second-biggest market.

Performance: (All figures in U.S. dollars) McDonald’s shares hit an all-time high on Aug. 12 of $221.93. They sold off last week, when the company reported mixed third quarter earnings.  The shares were  $196.70 at the time of writing.  Despite the setback, the shares are up about 9% in the last 52 weeks. The stock trades at 25.82 times its trailing 12-month earnings.

Financials: Sales growth slowed at U.S. restaurants, but internationally the chain fared better, posting 5.9% sales growth at stores open at least 13 months.  Revenue for the quarter grew to $5.43 billion, up 1% from last year, while net income fell about 2%.

 Recent developments: McDonald’s continues to renovate in the U.S. and Canada, adding digital ordering equipment with software that captures information about what is being purchased and when. It continues to sell stores to franchisees, refresh menus, and experiment with non-meat fare.

It joined the North American meatless hamburger wars in September with a test of a plant based Beyond Meat burger in southwestern Ontario. The region’s demographic is a stand-in for ‘anywhere’ North America.

In July, it ended its ended an exclusive delivery deal with UberEats (NYSE:UBER) because of high fees and joined forces with Doordash, which is the largest food delivery service in North America. This year one-in-four McDonalds worldwide will offer delivery.

Another interesting development is that McDonald’s has spent hundreds of millions of dollars to buy companies that specialize in voice recognition and AI software to better understand consumer tastes. It has set up a research centre in Silicon Valley where engineers and data scientists are trying to put the information to use.

The latest purchase, in September, was a startup called Apprente, which is a leader in the field of conversational technology. It hopes the software will leads to faster, simpler, and more accurate speech ordering at drive-thrus.

 Dividend: McDonald’s increased its quarterly dividend by 8% to $1.25 per share in September. The $5 annual payment yields 2.5% at current prices.

Outlook: McDonald’s is best in class. Investors should look past the quarterly earnings to the bigger picture. Its p/e ratio is the lowest of the group and the share price dip is an opportunity.

(This is an edited version of an article that appeared in the Nov. 4, 2019 edition of the Internet Wealth Builder.)