Why McDonald’s Corporation Offers Profit Potential

McDonald’s Corporation (NYSE:MCD) sits on a 3.4% yield.

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WASHINGTON, DC — Investors seemed surprised by McDonald’s (NYSE: MCD.US) fourth quarter earnings report. The stock fell 0.9%, to $94.43. Admittedly, it caps off a disappointing year. However, long-term investors need not fret. There are compelling reasons to purchase the stock at this point, instead of rivals Burger King Worldwide and Wendy’s.

A venerable industry participant, it has proven its mettle throughout time.

Examining the results

 

Fourth quarter comparable sales fell 0.1%. On the bright side, the average check rose, but customer count fell. Total revenue, which includes new restaurants, rose 2%, to $4.7 billion, and operating income and net income were flat, at $2.2 billion and $1.4 billion respectively. However, thanks to share buybacks, diluted earnings per share rose 1%, to $1.40.

Examining results by region, U.S. comps declined by 1.4%, but operating income did manage to increase by 1%. This follows a couple months of lackluster top-line results. The company changed its menu offerings, with a Dollar Menu and More. McDonald’s offers more value, unlike competitors such as Burger King and Wendy’s. This seems like a smart pricing strategy. Since the segment managed to increase operating income despite falling comps, once customers accept the new pricing and flock to the restaurants, it should flow through to income.

The dollar menu for breakfast items such as the Sausage McMuffin remains in place. On other items, there will be more food. For instance, the Bacon McDouble has two beef patties, cheese, bacon, onions, ketchup, mustard, and pickles for two dollars. The Buffalo Ranch McChicken is still a dollar, or you can get bacon for a dollar more.

The Asia/Pacific, Middle East and Africa (APMEA) region was weak, with comps falling by 2.4%, and operating income sliding 8%. Japan continued to hurt results, and China and Australia were flat. McDonald’s has pledged to improve APMEA’s results by focusing on affordability and menu items catered to local tastes. Based on the company’s record of accomplishment of international expansion, with restaurants in over 100 countries, it would seem a good bet it will be successful. Europe was a relative bright spot, with comps increasing 1%, and operating income rising 3%.

Returning cash to shareholders

McDonald’s spent $1.3 billion on dividends and share buybacks during the quarter, capping off a year in which it shelled out $4.9 billion. The average diluted share count was 999.3 million, down from 1.01 billion in the year ago period. Meanwhile, the fast food giant pays $3.24 a share in dividends per annum.

This does not come at the expense of investing in its business, however. The company will spend $2.9 to $3.0 billion on capital expenditures relating to 1,500 to 1,600 new restaurant openings and giving makeovers to over 1,000 existing locations.

Final thoughts

The stock now trades at a P/E of 17, thanks to the stock’s decline over the past few months. The price is off about 9% since reaching over $103 last April. This compares favorably with fellow fast food purveyors.

Burger King trades at a multiple of 38 times trailing earnings. While its earnings more than doubled to $0.47 for the first nine months of 2013, there are high expectations of continued growth. The company did introduce the Big King sandwich, but it looks and sounds a lot like the Big Mac.

McDonald’s smaller rival Wendy’s trades at an astronomical P/E of 95. The company did manage to turn a profit, but it was a tiny $12.4 million, or $0.03, for the first nine months of the year. It will provide little comfort that it reported a loss of over $19 million, or $0.05 a year ago

Meanwhile, McDonald’s shareholders will get paid while waiting for results to improve. The shares have a 3.4% dividend yield, and the company has consistently raised its payout every year since 2008.

McDonald’s may require patience while waiting for top-line growth to resume. However, investors will enjoy the 3.4% yield while waiting. Patience is not only a virtue, it may also prove profitable.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Lawrence does not own shares in any company mentioned. The Motley Fool has recommended shares in Burger King.

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