McDonald’s Corporation (MCD): Still Attractive For Income Investors

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Competitive analysis

Yum! Brands, Inc. (NYSE:YUM) has around 4,429 KFC outlets in China with only 918 Pizza Huts casual dining restaurants and 171 Pizza Hut home service outlets. Nearly 50% of the company’s revenue comes from China.

KFC fried chicken outlets are the major revenue generator. But KFC outlet was badly hit when news broke in late December that chickens from two of the company’s supplier have found excessive antibiotic levels. This news has resulted in 7.5% drop in the share price. This was not the end, as the avian flu outbreak in China has further affected the same store sales, which has resulted in 19% decline in revenue from China from a year earlier in May.

Second quarter results have still not been better with sales declining by 12% from a year ago. Same store sales also declined by about 20% with KFC same store sales declining by 26%. Moreover, the stock is trading at more than 23 times its 2013 estimates, which in my opinion is overvalued as the matters discussed above has affected the financials of the company.

On the other hand, Starbucks Corporation (NASDAQ:SBUX)‘ performance in Asia is commendable, as the company has delivered double digit comparable store sales growth for eleven consecutive quarters in China and Asia Pacific region.Comparable store sales growth was 22% and 15% for fiscal 2011 and 2012 respectively. Net revenue from Asia has also increased by 31% in fiscal 2012.

Considering these facts, Starbucks Corporation (NASDAQ:SBUX) plans to expand its operation in Asia. China is where the company is aggressively planning to double its outlet to around 1500 by 2015. India, Asia’s third largest economy also has Starbucks now. However, it would be interesting to see what strategy the company uses to please tea lovers with coffee.

Starbucks financials are strong with 11% growth in revenue for first quarter over the last year. But a closer sector analysis shows that the company has yet not made profits in the UK in the past fifteen years except for a small profit in 2006.

Starbucks Corporation (NASDAQ:SBUX) recently reported a loss of $30 million in the UK for the 12 months ended September 2012. The company is undertaking measures to make the segment profitable like closing unprofitable stores or relocating them to a more cost effective location. However, it would take some time for the investors to be sure if this decision of the company will pull it into a profitable zone.

Moreover, the company is highly overvalued with current PE of 35.3 and an estimated PEG of 2.2 for fiscal 2014.

The bottom line

McDonald’s Corporation (NYSE:MCD) is a good investment opportunity for investors who want a regular payout from the company. As discussed dividend yield for the company is 3.1%, much higher as compared to its competitors Starbucks with 1.21% and Yum! Brands, Inc. (NYSE:YUM) 1.87%. Moreover, the company is in constant process of providing variations in its menu, location and operation making it an attractive opportunity for investors.

The article McDonald’s: Still Attractive For Income Investors originally appeared on Fool.com and is written by Anjum Khan.

Anjum Khan has no position in any stocks mentioned. The Motley Fool recommends McDonald’s and Starbucks. The Motley Fool owns shares of McDonald’s and Starbucks. Anjum is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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