Better Restaurant Buy: MCD Stock or QSR?

Restaurant stocks such as McDonald’s are enticing investments given expansion plans and a widening earnings base.

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Quick-service restaurant stocks south of the border have been on an absolute tear in the past decade. For instance, shares of Chipotle Mexican Grill and McDonald’s (NYSE:MCD) have surged 332% and 295%, respectively, since December 2013, after adjusting for dividends. In this period, the S&P 500 index has returned “just” 210%.

If we expand the investment horizon to 20 years, the results are even more impressive, with Chipotle Mexican Grill returning over 5,000%, followed by MCD stock at 1,280% and the S&P 500 index at 428%.

So, let’s see how a TSX restaurant stock in Restaurant Brands International (TSX:QSR) stacks up against McDonald’s right now.

McDonald’s growth story is far from over

Valued at US$211 billion by market cap, McDonald’s is among the largest fast-food brands globally. Despite its massive size, McDonald’s plans to open roughly 9,000 locations and add 100 million members to its loyalty program in the next four years, driving revenue and cash flows higher.

The company estimates net new restaurant growth at 4% in 2024, as 2% of systemwide sales growth is forecast to come from new stores. Further, it aims to grow the restaurant count between 4% and 5% annually post-2024.

Its expansion plans suggest that McDonald’s will spend US$2.5 billion in capital expenditures. This figure is estimated to increase by US$400 million annually between 2025 and 2027.

Basically, McDonald’s aims to end 2027 with a global footprint of 50,000 locations, up from 41,198 locations at the end of the third quarter (Q3) of 2023. In the next four years, it will open 7,000 locations in its international developmental licensed markets, such as China.

McDonald’s will also open 1,900 locations in international markets such as Canada, Australia, and France, which account for 50% of total sales, while new locations in the U.S. might total less than 1,000.

Priced at 25.7 times forward earnings, MCD stock is not very cheap. However, adjusted earnings are forecast to rise by 10% annually in the next five years. Moreover, the company pays shareholders an annual dividend of $6.68 per share, translating to a forward yield of 2.3%. These payouts have risen by 8.4% annually in the last 15 years.

Is QSR stock a good buy right now?

Among the fastest-growing fast-food companies in the world, Restaurant Brands International is valued at $46 billion by market cap. It owns and operates iconic brands such as Burger King, Popeyes, and Tim Hortons. Further, Restaurant Brands International expanded its portfolio with the acquisition of Firehouse Subs two years back, adding around 1,200 locations and $1.1 billion in system-wide sales.

QSR stock offers shareholders an annual dividend of $2.94 per share, indicating a yield of 2.86%. These payouts have surged by more than 250% in the last eight years.

Priced at 22.6 times forward earnings, QSR stock is reasonably valued, given Bay Street forecasts adjusted earnings to increase by 11.2% annually in the next five years.

QSR ended Q3 with a total debt of $13.3 billion and $1.3 billion in cash. It has a net leverage ratio of 4.8 times, which might make investors wary, especially if interest rates remain elevated.

The Foolish takeaway

Both MCD and QSR are viable long-term investments for shareholders, as the businesses are positioned to thrive across business cycles. Canadian investors can consider adding both the restaurant stocks to their equity portfolio and benefit from consistent dividend payouts and long-term capital gains.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and Restaurant Brands International. The Motley Fool has a disclosure policy.

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