The Golden Arches haven’t shone for investors lately.
Over the past 12 months, McDonald’s MCDONALD'S CORP.
stock has returned less than 3%. That compares with an average 21% return for restaurant stocks. Part of the problem is that growth is always harder for a big, mature business — and with a market value of $93 billion, McDonald’s is larger than its two biggest rivals — Starbucks STARBUCKS CORPORATION
and Yum Brands YUM! BRANDS
But the company has found ways to boost sales before. Job No. 1: Freshen up the menu.
Want wings with that?
McDonald’s has had trouble finding new menu items that diners want.
McDonald’s is no longer the basic burger, fries, and soda joint you remember from your childhood. Facing new upscale competitors, it responded by adding salads, wraps, and specialty coffees to the menu. This worked for a while: U.S. same-store sales climbed an annual average of 5% from 2003 to 2011, according to the brokerage Raymond James.
But lately the Oak Brook, Ill., company has struggled to find “the next big thing,” says Edward Jones analyst Jack Russo. Recent new items like chicken wings haven’t been a hit. (And until McDonald’s settles on the right mix, the added complexity in the kitchen from new items “slows down the drive-thru,” says Russo.)
U.S. same-store sales, though high at an average $2.5 million, have plateaued.
A partial bet on China
The country is important to the chain but still not the main event.
The U.S. market is well saturated, leaving McDonald’s stuck fighting for share with both fancier brands like Chipotle and low-cost Taco Bell fare. So an obvious avenue for future growth is the vast new Chinese market. Last year, 20% of the chain’s store openings were in China.
But China remains a “smaller piece of a much bigger business,” says Morgan Stanley analyst John Glass. He estimates the country represents up to 4% of profits.
Competitor Yum Brands, which owns Taco Bell, KFC, and Pizza Hut, gets a third of its earnings from China. That makes McDonald’s a less risky play — Yum saw a 4% drop in revenues last year in part because of a bird flu outbreak, for example — but also means there’s less potential for fast profit gains.
No shortage of cash
A steady flow helps the company pay back its investors.
Since 1976, McDonald’s has consistently delivered cash back to shareholders in the form of dividends or share repurchases. Today the stock offers an attractive dividend yield of 3.4%. And there’s every reason to think that the business will keep delivering a strong income.
McDonald’s is built to generate consistent cash. When a franchisee launches a new store, the company often purchases the land and collects rent on top of franchise fees. So even in tough times, the “downside is relatively limited,” says Westwood Holdings portfolio manager Matthew Lockridge.
If management can find that elusive new hit product and deliver improved growth, that plus a reliable payout may satisfy value-minded investors.