As the dining industry has evolved in recent years, fast-food chains have endured more than their fair share of challenges. But despite the proliferation of competing concepts, changing consumer preferences, and even food-quality scares, fast food always seems to find a way to survive and thrive thanks to its unrivaled value and relative convenience.
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But not all fast-food stocks are equal. To help get you started -- and in no particular order -- here's why investors should consider picking up shares of Yum Brands (NYSE: YUM), McDonald's (NYSE: MCD), and Popeyes Louisiana Kitchen (NASDAQ: PLKI) in 2017.
Image source: Yum! Brands Inc.
The case for Yum! Brands
Best known for its massive base of almost 43,000 Taco Bell, KFC, and Pizza Hut restaurants globally, Yum! Brands is a fast-food behemoth that recently enjoyed a fresh start.
Some investors might get squeamish while taking a quick look at Yum!'s chart in recent months, which shows a nearly 30% decline this past November. But as I pointed out last month, the move wasn't indicative of business trouble. Quite the contrary, this was the direct result of Yum!'s successful separation of its China business last year, through which shareholders received one share of Yum China Holdings (NYSE: YUMC) stock for each share of Yum! Brands they owned, as well as a cash payout for any fractional shares remaining.
Of course, Yum! China is a compelling bet in and of itself, with plans to nearly triple its number of restaurant units over the long term from 7,300 at the end of last quarter. But I'm even more compelled by Yum!'s strategic vision for growing its unit base, driving traffic, and maximizing profits while generating long-term shareholder value.
As part of that vision, Yum! Brands intends to increase its franchise ownership to at least 98% by the end of fiscal 2018, up from 77% in October. And with Yum! China operating on its own, the legacy Yum! Brands business can now focus on developing its distinctive brands, as well as better equipping and recruiting its franchise operators, and partnering with them to foster further growth. In addition, Yum! will pursue ambitious cost-restructuring efforts with the aim of reducing annual capital expenditures by 80%, to $100 million, and reducing general and administrative expenses by $300 millionby the end of fiscal 2019, as well as optimizing its capital structure.
Add to that a recently declared $0.30 per-share quarterly dividend (Yum! will aim for a payout ratio of 45% to 50% of annual net income) that yields a healthy 1.9% annually at today's prices, and the fact that it remains on track with its plan to return more than $13.5 billion to shareholders between the fourth quarter of 2015 and 2019, and I think Yum! Brands is a compelling diversified bet for long-term investors.
The case for McDonald's
McDonald's needs no introduction with its more than 36,000 locations worldwide. But the surprisingly nimble fast-food titan has consistently demonstrated its relative strength, keeping consumers coming back for more even as competitors falter. More specifically, McDonald's marked its fifth straight quarter of positive comparable-sales growth with its latest report at the end of October, with global comps climbing 3.5% thanks to positive results across each of its segments. And with the help of its ongoing plan to refranchise over 4,000 locations by the end of 2018 -- which should result in net general and administrative cost savings of $500 million -- McDonald's adjusted earnings per share already climbed 16% over the same period.
Image source: The Motley Fool.
Not to be outdone by its biggest rival above, McDonald's also just raised its dividend by 6% starting with the fourth quarter of 2016 -- it now yields roughly 3.1% annually -- and remained on pace to return roughly $30 billion to shareholders through dividends and repurchases in the three-year period ending 2016.
Investors will receive more color with its quarterly report next week on whether McDonald's was able to continue its streak of positive comps, as well as whether those ambitious capital returns will continue in 2017. But with shares up a modest 6% over the past year as of this writing, I think McDonald's stock is poised to deliver more market-beating returns going forward.
The case for Popeyes Louisiana Kitchen
Image source: Popeyes Louisiana Kitchen
Finally, I'd be remiss if I didn't include a smaller competitor with even more room to grow in the fast-food space. And it's hard to find a better candidate to that end than Popeyes Louisiana Kitchen.
In fact, shares of the chicken-centric quick-service restaurant (QSR) chain are currently trading near all-time highs following its strong quarterly report in November. Popeyes' revenue climbed a solid 4.7% year over year thanks to a 6.3% increase in restaurant count, to just over 2,600 locations, as well as a 1.8% increase in global same-store sales. The latter figure was comprised of increases in domestic and international same-store sales of 1.5% and 3.7%,respectively.
That result might not seem overwhelmingly impressive, but keep in mind that Popeyes' stock was down significantly after softness in the U.S. market resulted in flat domestic same-store sales two quarters ago, breaking a more than five-year streak of positive comps stateside. So investors were more than pleased to see the company resume that streak last quarter, while international comps continued to rise for the 27th consecutive time.
But it's also worth noting that, through it all, Popeyes has consistently increased its slice of the (chicken pot) pie, with domestic market share of the chicken QSR segment increasing 30 basis points sequentially and 90 basis points year over year, to 26.9% last quarter. With its unique concept, continued unit growth, and proven ability to increase traffic, I suspect Popeyes stock will be setting fresh highs for patient investors for years to come.
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