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

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.

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

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.

It appears that McDonald’s is not wasting money and investors are reaping the benefits from its highly cash-generative operations.

The competition

Yum! Brands, Inc. (NYSE:YUM) is possibly one of McDonald’s closest competitors. However, while the McDonald’s establishments near me are thriving, the KFC recently closed down. Is this an indication that Yum! Brands, Inc. (NYSE:YUM) might not be such a good investment?

Figures in $U.S. millions

Yum’s cash flows are significantly smaller than those of McDonald’s, but Yum! Brands, Inc. (NYSE:YUM) is a smaller company.

Like McDonlad’s, Yum! Brands, Inc. (NYSE:YUM)’s spending on investing activities is low, leaving plenty of free cash. Indeed, the company returned 60% of its operating cash flow to shareholders during 2012. Over the past four years, the company has been gradually increasing its cash returns to shareholders, from 28% of operating cash flow during 2009, to 35% during 2010, and 50% during 2011.

Although Yum! Brands, Inc. (NYSE:YUM) is gradually improving shareholder returns, they are still not the same as the highly lucrative returns that McDonald’s offers investors. For example, during 2012, Yum! Brands, Inc. (NYSE:YUM) returned around $1.4 billion to shareholders through both buybacks and dividends, which, as a dollar figure, is much smaller than the amount that McDonald’s returned to shareholders.

That said, during 2012, Yum generated $13.6 billion of revenue, indicating that the company returned roughly 10% of revenue to shareholders. McDonald’s, on the other hand, generated $27.5 billion of revenue during 2012, but returned $5.2 billion to shareholders, or 19% of revenue. Obviously, when considering cash generation and cash return to shareholders, McDonald’s is the clear winner.

The pizza revolution

Another serious competitor to McDonald’s dominance is Domino’s Pizza, Inc. (NYSE:DPZ).

Domino’s Pizza, Inc. (NYSE:DPZ) operates its business through several different corporate entities. The United States-based division of Domino’s is responsible for operations in the U.S. alone. Meanwhile, Domino’s has separate corporate entities in Germany, the UK, and Australia, each responsible for the operation and profits of franchises in their separate regions.

However, in this piece, I will be focusing on Domino’s North American operations, which are controlled by the corporation listed on NYSE.

Figures in $U.S. millions

Domino’s U.S. operations are obviously not as profitable as the global operations of both Yum and McDonald’s. That said, the company has a strong free cash flow and, after deducting investing activities from operating cash flow, the company has plenty of cash available to return to shareholders.

During 2011, the company returned $130 million to shareholders by way of share buybacks. However, this was the first time that Domino’s had returned any cash to shareholders. During 2009 and 2010, the majority of Domino’s financing cash flow was spent on paying off debt, which should lead to improved shareholder returns in the future.

According to Domino’s cash flow statement, 2012 was the company’s first year of paying dividends. The company returned $185 million to shareholders through dividends, which was roughly 11% of the company’s revenue. However, the company produced $176 million in operating cash flow during 2012, meaning that Domino’s returned 105% of its operating cash flow to shareholders in its first year of paying dividends.

Additionally, during 2011, the company repurchased $130 million of stock (85% of operating income). Lastly, I believe that Domino’s has put itself in a strong financial position over the past few years, and shareholders should expect higher returns in the future.

Overall

Overall, for high shareholder returns and a piece of the action, McDonald’s stock has offered the best returns, but Domino’s looks to be the future star, with rising shareholders returns and rapidly growing net income.

The article Fast Food Pays: Who Returns The Most Cash To Shareholders? originally appeared on Fool.com and is written by Rupert Hargreaves.

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