YUM! or McDonald's for the Dividend Portfolio?

Ash is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

People get hungry, and sometimes they just want a quick fix. YUM! Brands (NYSE: YUM) and McDonald’s (NYSE: MCD) are in the business of providing those quick fixes. Both of these companies provide fast food around the world, and both companies pay a great dividend, which would look nice in any income investor’s portfolio. Let’s explore YUM! and McDonald’s.

Big Mac Please!

McDonald’s serves customers in over 100 different countries millions of times per day. After decades of doing so, the fast food chain seems to have it down to a tee. EPS growth over the last five years at McDonald’s is an incredible 20.17%. Three year EPS growth is at 9.78%, and the one year is 11.3%, so you can see that the 20% wasn’t pushed up by a single fluke.

Along with the great EPS growth at McDonald’s, investors have also been receiving higher dividends year-after-year. The five-year dividend growth rate for McDonald’s is 15.36%, and the current yield on the stock is 3.5%.

McDonald’s is currently trading just under the $90 range, and analysts believe that this company is a buy. Twelve of the twenty-five analysts that are covering the stock have it rated as a strong buy. The mean recommendation from the analysts is 1.92, a moderate buy.

McDonald’s collects a 4.28% royalty fee on franchised store sales, which gives them an 82% EBITDA margin in that portion of the business. McDonald’s also operates their own restaurants, which give the company an EBITDA margin of around 18%.

Foot traffic at McDonald’s restaurants will continue to rise, as will the number of restaurants built around the world. There are currently 28,000 McDonald’s franchises spread throughout the globe and 6,500 McDonald's wholly-owned restaurants. 

Tastes YUM!my

YUM! Brands operates and franchises out Taco Bell, KFC, Pizza Hut, and WingStreet restaurants around the world. YUM! is the world's largest fast food company, with more than 38,000 restaurants in over 120 countries.  

YUM!, like McDonald’s, is posting some impressive EPS growth numbers. Their 5 year growth rate is 13.29%, the 3 year is 12.99%, and the one year is 13.90%. These numbers are consistent, a great thing for investors to see.

At the top of the article I promised that both stocks would do well in a dividend portfolio. McDonald’s definitely will, and so will YUM!. YUM! has raised distributions for the last eight years. The 5 year dividend growth rate is 16.71%; now that’s what a dividend investor wants to see.

The overall EBITDA margin over the last twelve months at YUM! Brands is 20.7%, and the average over the last five years is 18.3%.


Although I don't think there is much of a shot of Wendy's (NASDAQ: WEN) beating out McDonald's or YUM!, it is certainly a competitor to the two. It could be said that Wendy's is looking to make itself more into a dine-in type experience, instead of the grab-and-go clientèle that McDonald's and YUM! cater to. Let's take a look at how all three companies stand up side-by-side:

<table> <tbody> <tr> <td> </td> <td><strong>McDonald's</strong></td> <td><strong>YUM! Brands</strong></td> <td><strong></strong><span><span></span></span><strong>Wendy's</strong></td> </tr> <tr> <td><strong>PE Ratio</strong></td> <td><strong>16.7</strong></td> <td>19.3</td> <td>N/A(Forward: 27.94)</td> </tr> <tr> <td><strong>P/Tangible Book</strong></td> <td><strong>8</strong></td> <td>61.87</td> <td>N/A(P/Book: 0.93)<strong> </strong></td> </tr> <tr> <td><strong>P/Cash Flow</strong></td> <td><strong>12.9</strong></td> <td>13.2</td> <td>14.2 </td> </tr> <tr> <td><strong>Dividend Yield</strong></td> <td><strong>3.5%</strong></td> <td>2.0%</td> <td>3.4%</td> </tr> <tr> <td><strong>Debt to Equity</strong></td> <td>0.96</td> <td>1.43</td> <td><strong>0.7 </strong></td> </tr> <tr> <td><strong>Return on Assets</strong></td> <td>16.1</td> <td><strong>18</strong></td> <td>-0.31 </td> </tr> <tr> <td><strong>Return on Investment</strong></td> <td>20.4</td> <td><strong>31.1</strong></td> <td>-0.33 </td> </tr> </tbody> </table>

As you can see, McDonald's is the fairer priced stock based upon the lower PE ratio and the significantly lower price to tangible book ratio. McDonald's also has the better dividend and is a slightly better deal if you're investing based upon cash flows.

When it comes to the returns being generated, something that would make you believe the company has better management, YUM! is the clear winner.

Wendy's only "advantage" is a lower debt to equity ratio. It's nothing too spectacular, and I think that both McDonald's and YUM! present better investments to any investor.  

Final Verdict

Typically you would want to be diversified, but I think that in this situation you could own both of these stocks, with some others of course, in a dividend portfolio. Both stocks have their pros and both have a few cons. Overall, I would recommend both of these stocks for the long haul. 

Both companies provide incredible brands that have a worldwide presence and show no signs of disappearing within the next decade. Throw these stocks in with Wal-Mart, Aflac, Chevron, and perhaps a technology play for a great looking, long lasting dividend portfolio. 

Ash1402 has no positions in the stocks mentioned above. The Motley Fool owns shares of McDonald's. Motley Fool newsletter services recommend McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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