McDonald’s Corporation (MCD), Wal-Mart Stores, Inc. (WMT): An Autopsy of a Living Wage

Starbucks Corporation (NASDAQ:SBUX) is an alternative to McDonald's for the socially responsible investor. Its benefits start at 20 hours work per week. Although pay for employees hovers around minimum wage tips are expected to supplement that and overall, benefits are better than most restaurant/cafe jobs.

MCD Total Return Price data by YCharts

Fundamentally and ethically better

Starbucks Corporation (NASDAQ:SBUX) and Costco are better names going forward than Wal-Mart and McDonald's with better share price appreciation and expected growth rates.

Gross margin at Wal-Mart has basically stayed flat within a range of 24.66% and 25.50% over 5 years and worsening, currently at the low end at 24.66%. At Costco gross margins have ranged from a much lower 12.13% to 12.92% before the financial crisis but are improving again at a current 12.64%.

Gross margins are great at Starbucks ranging from 52.71% in 2008 to a high of 60.17% in 2010 currently at 56.96%. Gross margins at McDonald's are almost unchanged from 37.71% in 2008 to today's 37.61% and contracting from 40.56% in 2011.

McDonald's is the Dividend Aristocrat but all these have yield: Starbucks 1.20%, Costco 1.10%, McDonald's 3.00%, and Wal-Mart 2.40%.

Of these four, analysts see single-digit growth at McDonald's with five year EPS at 8.49%, then Wal-Mart at 9.29%. Much better growth is predicted at Costco at 13.47% and Starbucks shines with 18.93% expected five year EPS growth. I think analysts are right on the money with these figures.

MCD EPS Diluted Quarterly YoY Growth data by YCharts

Trailing P/Es for Starbucks and Costco are rich at 35.33 and 25.21 respectively, these are both global companies with room for expansion. Wal-Mart has a trailing P/E of 15.25 and McDonald's at 18.71 but they just aren't growing and competition is nipping at their heels from Target Corporation (NYSE:TGT) (which pays its employees more) and dollar stores for Wal-Mart and The Wendy's Co (NASDAQ:WEN), Burger King Holdings, Inc. (NYSE:BKC) and Yum! Brands, Inc. (NYSE:YUM) for McDonald's.

The Foolish takeaway

Costco and Starbucks have performed better than Wal-Mart and McDonald's and despite less yield total return will continue to be better. McDonald's and Wal-Mart have headline risk as well as worsening margins. These latest headlines on living wages just reflect a long-term blind spot.

Both Costco and Starbucks are socially responsible investing darlings, especially Starbucks. Starbucks, of all of these, has the best outlook for growth and the highest gross margin and is a good placeholder for quick serve restaurants in a portfolio.

The article An Autopsy of a Living Wage originally appeared on Fool.com and is written by AnnaLisa Kraft.

AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale, McDonald's, and Starbucks. The Motley Fool owns shares of Costco Wholesale, McDonald's, and Starbucks. AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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