You Might as Well be Dealing Drugs

By Jason Hall - September 17, 2012 | Tickers: DPZ, JACK, MCD, PZZA, YUM | 0 Comments

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I consider myself to be an ethical investor.  I really like investing in companies that not only have huge potential for growth and profit, but also have huge potential to improve the world we live in, the lives of those that use their products and services, and the lives of the company’s employees and suppliers.  But I’m not really unique in that, am I?  I am sure that most of us prefer investing in these companies.  So what makes me any different than the rest of the investor crowd?  Well, it’s not what I will invest in, as much as what I will not invest in. 

My stock portfolio reads like a “who’s-who” of companies that an ethical investor would be happy to hold shares of:

• Whole Foods Market, whose “mission & values” statement is specifically focused on sharing the wealth amongst all stakeholders- customers, suppliers, team members (fancy speak for employees), and shareholders. 
• MAKO Surgical- an innovative company focused on pushing the limits of robotic surgery into orthopedics, drastically reducing recovery times, and improving quality of life years sooner than traditional surgeries
• Waste Management- this company is the largest recycler in the US, and it is driving innovation in using methane from its landfills to fuel its trucking fleet
• Zipcar- a company that is empowering urban dwellers to be able to live “car free” via convenient access to a shared fleet for the occasional need, therefore reducing the environmental impact of more cars on the road.  This system saves money for those who use its service as well as improving the environment.
• GT Advanced Technology- one of the leaders in advanced solar technology, whose developments will further reduce the demand for fossil fuels

But when I dig a little deeper into my portfolio, I find that I’m not as “pure” in my investing strategy as I would have myself believe; I also own shares in companies that may not be considered “ethical leaders.”  These include:

• Bank of America- Participated in financial shenanigans that nearly collapsed the United States-nay- the world economy.  A company that continues to make it hard for people to keep their homes through mortgage difficulties. 
• Seadrill-This company is an ultra- deepwater drilling specialist that further perpetuates the use of oil, further damaging the environment. 

However, these two pale in comparison to one of my favorite holdings, a company that is participating in and enabling something worse than anything Bank of America or its banking brethren could have ever achieved, namely reducing the life-span of an entire generation. 

What is this nefarious investment of mine?

That holding is YUM! Brands (NYSE: YUM). Yep, it breaks my heart that I own a company doing so much damage to so many people. 

Are you nuts?

Maybe, but there’s a method to my madness. Yes, it’s not like they are actually killing people in the kitchens, or poisoning their food (though there are arguments that there’s not much difference between poison and fast food.)  We will discuss the health impacts, and whether investing in this type of business is ethical or not.  But before I do that, let’s take a look at why I am invested in YUM! Brands:

MCD data by YCharts

Investing in the fattening fast food business is clearly very good for your financial health.  A 5-year investment in any of the big names in American obesity, with the exception of Jack In The Box (NASDAQ: JACK), would absolutely trounce the S&P 500, generating anywhere from 78% to over 113% in returns, not including dividends.  

Speaking of which, dividends are a great way for a mature business to reward shareholders.  Despite this recent article by Morgan Housel that challenges how many businesses prioritize dividend payouts, a business’s ability to pay a consistent dividend over time shows shareholders that their long-term investment will allow them to keep holding their shares and have reliable income, or for those not ready to draw on the income, reinvest the dividends and essentially get “free” (minus any taxes) shares:

MCD Dividend Yield data by YCharts

Of the companies listed above, only my cherished YUM! Brands, and the venerable McDonald's Corporation (NYSE: MCD), have rewarded shareholders with a consistent dividend over the past decade.  Domino's Pizza (NYSE: DPZ) did pay a $3 per-share dividend this past April, but as this article describes, the company paid it out of a $1.68 billion dollar debt facility.  Frankly, I cannot think of a worse use of debt than paying a dividend.  So, maybe Mr. Housel was onto something...  Papa John's (NASDAQ: PZZA) ​has never paid a dividend as a public company. 

The data is pretty clear:  Investing in fast-food restaurants can clearly be very financially rewarding, and there are two out of the five we are discussing that have historically given the best total returns, when factoring share price appreciation, and dividends:  YUM! Brands & McDonalds. 

YUM! Brands, who owns KFC, Taco Bell, and the Pizza Hut restaurant chains, is well-established with over 38,000 locations.  However, there is tremendous opportunity for growth in Asia, especially China, where the middle class alone is larger than the entire population of the United States.  And when you look at the fact that it sports three very diverse restaurant experiences, there is a pretty enormous upside for expansion.  From their 2011 Annual Report (link goes to Investor Relations page):

"Results for 2011 reaffirmed our consistent record of success with 14 percent Earnings Per Share (EPS) growth, which marks the tenth straight year we delivered at least 13% growth... ... we opened a record 1,561 new restaurants outside the U.S...."

As for 2012, the company is projecting to open 1,700 new international locations, including at least 700 in China.  In comparison, the fast-growing Chipotle Mexican Grill only has about 1,000 total locations! How's that for growth? 

Okay, so you can make money, but at what cost?

This is where I face an ethical dilemma.  America is getting fat, and as our "Western Diet" spreads across the globe, the developing world is following suit.  Michael Pollan, author and Professor of Journalism at UC Berkeley, describes this very well in his book, "In Defense of Food," showing how, as societies become more developed, and as populations grow, processed foods that deliver most of their calories from carbohydrates (think breads, tortillas, sugars, sauces) and lots of fatty meats, become a larger part of the diet.  In turn, you see a concomitant increase in obesity. 

And the statistics don't lie.  From WebMD:

"The Western diet increased risk by about 18% overall of getting metabolic syndrome over nine years [of follow-up]," says Steffen, an associate professor of epidemiology at the University of Minnesota, Minneapolis..."

According to the statistics published by the National Conference of State Legislatures, regarding the increase in obesity, especially kids:  In 1971, less than 6% of children were obese.  By 2004, the number was over 15%! 

From the National Institutes of Health:

"...about half (42 to 63%) of obese school-age children were obese as adults."

From CBS News, reporting on this study:

"Every day, nearly one-third of U.S. children aged 4 to 19 eat fast food, which likely packs on about six extra pounds per child per year and increases the risk of obesity, a study of 6,212 youngsters found."

Needless to say, there is overwhelming evidence that the processed foods that we consume, many of which are consumed as inexpensive fast food, is really hurting America's waistline (not to mention heart, kidneys, liver, pancreas, and our joints from all the extra weight).  But does it mean that, as an ethical investor, I should divest myself of my shares?  I'm up over 20% in less than a year!  There has to be a way I can keep my shares, and still maintain my belief in owning companies that are doing real good in the world.  Right?

Part of the problem, part of the solution!

The bottom line is that fast food restaurant chains are a part of modern life, and busy consumers will continue to eat out.  With that said, there has been an increase in demand for healthy options.  Pressure from new government regulations-some reasonable, such as California's 2011 requirement that chains list calorie info, and some well-intentioned, yet maybe not so reasonable, such as the recent NYC ban on sodas larger than 16 ounces- are helping ensure consumers will have better information, and that leads to better choices. 

As a matter of fact, McDonald’s just announced their plans to add nutritional info to the drive-thru menu as well. From the announcement:

"At McDonald's, we recognize customers want to know more about the nutrition content of the food and beverages they order," said Michael Mangione, Jr., McDonald's owner/operator and president of the McDonald's Operators' Association of Southern California (MOASC)."

One of the things that led me to first invest in YUM! Brands is my love of their "Drive-Thru Diet" menu, providing healthier alternatives for people on the go.  As a busy person, having a go-to option for a quick bite that doesn't lead to tipping the scales, is very important to me.  And the trend is growing:

From the New York Daily News, July 2011:

"More than 15,000 eateries across the country agreed to offer 600 calorie kids meals that feature two servings of fruit, veggies, whole grains, lean protein and low-fat dairy, the National Restaurant Association announced..."

All you have to do is Google "healthy fast food," and you will find dozens of healthy alternatives at any of the chains mentioned above...except the pizza places.  Just accept the fact that some things need to be bad for you...

For here, or “gotta go?”

I am keeping my shares of YUM! Brands.  While I don't own shares of any of the other companies listed, owning these companies is surely a better choice than dealing drugs when it comes to providing income.  But the reason I own share of YUM! and not the others is simply that YUM! has nice diversification that the others lack, being essentially single brand presences, limiting their ability to grow. 

With that said, I will continue to monitor YUM's expansion plans, creating jobs as well as profits as it grows.  As long as management continues to act in a shareholder-friendly manner, I will likely add to my position over time.  I am convinced that YUM! has the best potential for continued growth of all the companies mentioned. 

But maybe, to be really ethical, I should consider Chipotle...

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