Piplovic's Picks: McDonald's and Wendy's

05/31/2019 5:00 am EST

Focus: CONSUMER

Ned Piplovic

Assistant Editor, Eagle Financial Publications

Ned Piplovic is an income expert and editor at Eagle Financial Publications, one of the newsletter industry's most respective advisory firms; in the last StockInvestor Insights, he looks at two leading fast food plays.

McDonald’s Corporation (MCD) operates and franchises approximately 38,000 restaurants in the United States and more than 100 countries internationally. The stock as been rising steadily over the past several years without succumbing to overall market pullbacks.

In addition to a steadily rising share price, McDonalds has boosted its annual dividend over the past 42 consecutive years. With that record of consecutive annual dividend hikes and market capitalization in excess of $3 billion, McDonalds is one of just 57 S&P 500 companies with the exclusive dividend aristocrats designation.

On April 30, 2019, McDonald’s announced its financial results for the first quarter, which ended on March 31, 2019. While the results did not look too promising on the surface — total revenues were 4% lower, operating income down 2% and net income down 3% — a deeper look reveals more positive implications.

Excluding the impact of currency translation, total revenues increased 2%, operating income rose 3% and net income was 2% higher than the same period last year.

dditionally, comparable sales in the U.S. market increased 4.5% year over year for the first quarter. Comparable sales in the International Operated segment increased at an even higher rate of 6.0% for the period. This growth reflected positive results across all international markets, with the United Kingdom and France leading in growth terms.

Diluted earnings per share (EPS) remained at the same $1.72 level as prior year and McDonald’s returned $1.9 billion to shareholders through share repurchases and dividends income distributions.

The steady streak of more than four decades of dividend income increases continues to boost total returns above the asset appreciation pace. Just over the past 12 months, McDonald’s rewarded its shareholders with a combined total return of 26.3%.

The longer-term total return reached nearly 70% over the past tree years. Additionally, the McDonald’s shareholders more than doubled their investment over the past five years, with a total return rate of 113%.

Since falling to nearly $3.00 in late 2008, The Wendy’s Company (WEN) has risen more than 15-fold and has also experienced a significantly lower level of volatility than the market. The stock has also outperformed its fast-food restaurant peers over the near term, with a share price gain of nearly 20% since the beginning of 2019.

The company is best known for its made-to-order square hamburgers that use fresh, never frozen, beef. On May 8, 2019 the Wendy’s Company reported its first quarter 2019 financial results.

Total revenues advanced 7.4% year-over-year from $381 million in the first period last year to $409 million for the most recent period. Higher sales at company-operated restaurants and increases in franchise royalty revenues and fees drove the revenue growth. Same-store sales marked a 3.3% improvement over last year.

At company-operated restaurants, the drivers of higher revenues were an increase in the number of restaurants and positive same-restaurant sales from existing locations. Additionally, approximately $9.5 million in pass-through payments related to subleases as a result of the new lease accounting standard contributed to the revenues increase.

Even with higher revenues, the company managed to reduce its general and administrative expenses. This resulted in an operating profit increase of nearly 20% compared to the same period last year. Nominal earnings increased 58% from $20.2 million last year to nearly $32 million for the current quarter.

The current earnings per share (EPS) of $0.14 is 75% higher than the $0.08 EPS last year. However, after adjusting last year’s figure for tax charges and a few other accounting items, the current $0.14 EPS is still 27.3% higher than the $0.11 adjusted EPS in the same period last year.

Since the Wall Street analysts expected an $0.11 quarterly performance this year, the current adjusted EPS of $0.14 also beat earnings expectations by the same margin of 27.3%.

In addition to strong earnings growth, the company advanced its free cash flow more than 17% from $41 million last year to $48 million in the most recent period. In light of its first-quarter results, Wendy’s reaffirmed its outlook for full-year 2019. This outlook includes 3% to 4% sales growth, an adjusted EPS growth of 3.5% to 7.0% and an estimated free cash flow of $230 million to $240 million for the full year.

Wendy’s has been distributing dividends for more than four decades and has boosted its annual payout consecutively for nearly a decade. This dividend income combines with rising share prices to deliver a total return of 15.2% to the company’s shareholders over the past year.

However, longer-term results were significantly better. Over the past three years, the shareholders nearly doubled their investment with a 94% total return. Furthermore, Wendy’s has delivered a 146% total return to its shareholders over the past five years.

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