Fast food giants adapt to COVID-19 challenges

Plenty of challenges lie ahead for the three global fast food giants who have absorbed the full force of the coronavirus pandemic.

On the plus side, all three have rallied from their March lows. McDonald’s  has performed best and Yum!, which sells Kentucky Fried Chicken, Taco Bell and  Pizza Hut, the worst.

Their dividends appear safe, but are the stocks bargains? They are a lot cheaper than they were in early March, but not necessarily in terms of the short-term outlook. But the fast food stocks offer a long-term opportunity. They are global brands selling comfort food at a cheap price.

Here’s a closer look :

McDonald’s (NYSE: MCD)

McDonald’s s the world’s largest operator of fast-food restaurants with more than 50,000 outlets in 120 countries. The U.S. is the largest single market, though emerging markets, led by China, are increasingly driving sales and profits.

 Performance: McDonald’s shares are down 7.1% year-to-date, although the stock is the best performer among the Big Three fast food companies. 

Recent developments: First quarter profit fell 16.5% and McDonald’s suspended forward guidance given the coronavirus shock. CEO Chris Kempczinski said McDonald’s reached bottom in terms of restaurants closures in late March. About 75% are now open with more being phased in weekly.

Menus have been trimmed to simplify and speed up drive thru service. Physical distancing and other protocols are in place. Some U.S. franchisees are reopening with dining rooms. In England and Ireland, where stores were closed two months ago, all drive-through outlets will be reopened by early June.

In China, operations have resumed at nearly all restaurants and lessons learned are helping elsewhere. Although demand is weak, McDonald’s is still opening new stores. One hundred new outlets opened in China through the end of March and this will continue throughout the year.

 Dividend: McDonald’s increased its dividend in December to $1.25 quarterly ($5 per year), which yields 2.78% at current prices. The company may break its 43-year string of annual dividends increases, but the current payment appears safe.

 Yum! Brands Inc. (NYSE:YUM)

Yum  owns Taco Bell, Kentucky Fried Chicken, and Pizza Hut. It has 48,000 restaurants in 140 countries, but almost half of revenue come from the U.S. In 2016, the Chinese operations were spun off to Yum! China (NYSE: YUMC), which pays a 3% royalty on revenues to the parent company.

 Performance:  Yum’s shares are off 13.8% year-to-date and 12% since being recommended in November, making it the worst performer of the group.

Recent developments: Yum’s profits were down 68.3% in the first quarter and the company suspended forward guidance. It has $600 million in cash and a $1 billion unused line of credit, which CEO David Gibbs said in a conference call leaves Yum! in good shape.

At the end of April, 20% of its 50,000 stores were closed. But after a steep slide in March, global sales picked up significantly in April and stores are slowly reopening in May. Delivery and take-out sales are sharply higher, with online orders through mobile apps accounting for a quarter of the company’s annual sales.

Like McDonald’s CEO, Gibbs said Yum’s strengths lie in distinctive brands which stand for value, convenience, and normalcy, “all of which are highly sought out in these uncertain times and beyond.”

 Dividend: Yum’s quarterly dividend rose 12% with the February payment, from $0.42 to $0.47 quarterly. The new annual rate of $1.88 yields 2.16% and appears safe.

Outlook: Yum! has high hopes for The Habit Restaurants Inc. (NDQ: HABT) which it acquired for $375 million. Habit operates 300 company-owned and franchised fast-casual restaurants in the U.S. and China, featuring made-to-order hamburgers cooked over an open flame.

Yum! China, meanwhile continues to expand. It is betting that Chinese consumers in smaller cities where there is less competition want western food. It plans to open 850 stores in China this year.

Restaurant Brands International (TSX, NYSE: QSR)

The third-largest global fast-food company with operations in more than 100 countries. It has 26,000 stores, of which 70% are Burger Kings and 19% are Tim Hortons. The other 11% are Popeye’s Louisiana Kitchen locations.

 Performance: The shares are off 11.9% year to date and 15% since being recommended last November.

 Recent developments: RBI’s strategy is aggressive growth outside North America, especially with its Tim Hortons and Popeye’s brands. The Tim Hortons rollout in China has been slow. In the 15 months since the first store in China was announced, just 50 locations have opened, although the target was 1,500.

In the past few weeks, Tim Hortons has formed a relationship with Tencent, one of the world’s biggest tech companies, in hopes of speeding its expansion. Tencent operates the WeChat messaging app and a cellphone payments platform that has become one of the most common ways to move money in China. This may also eventually benefit Popeye’s, the last of RBI’s brands to enter the Chinese market.

CEO Jose Cils said in a recent conference call that 75% of all RBI restaurants are open, including 95% in the U.S. In Canada, 85% of Tim Hortons are open with most closures in places like universities or malls. Europe, Middle East, and Africa have been harder hit with 60% still closed.

RBI has rapidly rolled out home delivery as a COVID response.  Tim Hortons has gone from 250 restaurants offering this service to more than 1,000 in two months. Delivery sales are six times higher than pre-COVID, the company says.

 Dividend: RBI’s quarterly dividend increased 4% to $0.52 with the mid-March payment. The $2.08 annual payment yields 3.98% and appears safe.

(This is an edited version of an  article appeared in the May 25,   2020 edition of the Internet Wealth Builder.)

You might like:

As fast food giants reopen, long lineups appear
Tim Hortons owner eyes emerging market growth
YUM bets on growth in China