facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast blog external search

Investing in Restaurants and Fast Food

We all enjoy our occasional fast food, and our even more occasional outing to a nice restaurant.  We all leave our money there once in a while.  But should we invest in ownership of restaurants?

There is an old Wall Street adage that you never invest in restaurants, airlines or flower shops.  Putting money there is not investing, it is speculating.  Is it true?

We looked at McDonalds due to sheer size longevity, and here’s what we found:

  • McDonalds trades under the symbol MCD
  • The yield currently is 3.5%
  • The Beta is .69
  • It paid its first dividend in 1976
  • Dividends have been paid ever since and are increasing
  • Stock price has steadily risen over the years
  • But lately it has stalled – why?

Several factors have contributed:

  • Customers seeking healthier food
  • Rapidly escalating costs, especially labor and fringes
  • Less people with disposable income since recession and Obama
  • Difficulty recruiting good workers
  • Excellent competition by upstarts
  • Management changes not always successful
  • Saturation of localities
  • Differing tastes in other parts of the world

The strength of McDonalds has long been their ability to select locations, maintain quality with their suppliers, and develop advertising that is memorable.  They also have the distinction of being the most-often visited restaurant, and repeat business has long been their saving grace.  Like all businesses and market segments, the business cycle plays a part, and the government regulatory climate also hurts them (think Mayor Bloomberg).

Speaking of government policy, the food police are alive and well. One of the government policies involves the threat of interest rate increases.  This has caused problems with dividend payers, which had a bad first half of 2015.  Coule that be why MCD has been struggling as of late?  I don’t think so.  There are chains that are booming, such as Chipotle Grille and the Darden chain of retaurants.  

Does this make some restaurants good investments?  McDonalds went public in 1970 at an adjusted price od 20 cents per share.  A $1,000 investment at that time would be worth $480,500 today.  The compound return would be 14.71% annually, which is really good.  Is it still a good investment?  I look at the snowball effect. It is easy to grow a small snowball rapidly by rolling it around in the snow. However, a large snowball is much harder to grow.  This applies in business as well.

McDonalds has changed from a growth stock to an income stock, so it depends on your orientation.  With restaurants and airlines and flower shops, business failures are rampant. It is best to spread the risk and buy the ETFs involved in consumer discretionary products.  But if you are interested in finding a growth item, look to a company like Chipotle Grill, check it out, and if you decide to give it a go, look at it as a relatively short hold to make some money.

A tip - when the chain announces a dividend is going to be paid, consider selling.  When companies start paying dividends, it means they are no longer funding growth at a torrid pace.  At that point, you should look carefully at your own objectives. 

If you have any questions about this or any other blog, be sure to call our show on Saturday mornings at 10 AM!