McDonald’s Corporation (MCD), Yum! Brands, Inc. (YUM): What Should You Do?

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I went into McDonald’s Corporation (NYSE:MCD) yesterday and the restaurant, as usual, was very busy. The restaurant had five employees taking orders and five working in the kitchen. On average, they were serving five people every two minutes, and every person had an average order of about $5-$10. That’s roughly $25-$50 of revenue every two minutes. Over an hour, that is about $750-$1,500. Wages for the ten employees (assuming $10 per person per hour) would be $100. So, after deducting wages, the restaurant was making about $1,000 per hour in revenue.

McDonalds (MCD)However, this does not include the cost of goods sold. Actually, there is no need to attempt to work this out because a quick look at McDonald’s Corporation (NYSE:MCD) fourth quarter financial report reveals that, including cost of goods sold, selling, and admin costs, McDonald’s Corporation (NYSE:MCD) has a profit margin of approximately 30% on all of its products. Put that into my real world situation, and that particular restaurant was making $225-$450 in profit every hour. On a daily basis, if I assume the restaurant was turning over $1,500 during busy breakfast, lunch, and dinner periods (one-hour each), and $750 for the rest of the 12-hour day, this restaurant alone makes an average daily profit of $3,375.

What was the reason for this analysis? Well, while standing there, I thought, “Wow, this place is making so much money, but how much actually gets back to shareholders, and should I invest?” So, how much cash does the highly profitable McDonald’s Corporation (NYSE:MCD) return to shareholders, or should investors turn to its competitors in search of a better return?

McDonald’s cash flows

Metric 2009 2010 2011 2012
Operating Cash Flow $5.8 $6.3 $7.2 $7
Investing Cash Flow -$1.7 -$2.1 -$2.6 -$3.2
Financing Cash Flow -$4.42 -$3.7 -$4.5 -$3.9
Free Cash Flow $1.6 $1.8 $1.8 $1
Cash returned to Shareholders (Buybacks and Dividends) $4.7 $4.2 $5.6 $5.2

Figures in $U.S. millions

McDonald’s Corporation (NYSE:MCD)cash flows provide a good overview of the company’s financial situation and highly cash-generative operations. Investing activities, such as CAPEX spending, account for almost nothing, leaving plenty of free cash for the company and its shareholders.

During 2012, McDonald’s Corporation (NYSE:MCD) had an operating cash flow of $7 billion and it only required $3.2 billion for investing activities, leaving $3.8 billion of free cash available. With this cash, McDonald’s returned $5.2 billion to shareholders through a $2.9 billion dividend and $2.3 billion stock buyback (the company borrowed an additional $1.2 billion). Cash returned to shareholders accounted for 75% of operating cash flow during 2012, and on average, the company has returned between 65%-80% of net operating cash flow to shareholders during the past four years.

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