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Yum! Brands Has 16,000 More Restaurants Than McDonald's. But McDonald's Generates Over 70 Times More Revenue From This 1 Reliable Source.

Motley Fool - Sun Dec 31, 2023

I like to play a game with my kids when driving down the road: Name the publicly traded company that owns each business. We pass a Take 5 Car Wash -- that's owned by Driven Brands. We pass a Firehouse Subs -- that's owned by Restaurant Brands International.

"Dad, we're passing a Pizza Hut, a Taco Bell, and a Kentucky Fried Chicken. Which companies own these?" Well kids, you won't believe this, but these restaurant brands are all owned by the same company: Yum! Brands(NYSE: YUM). The company also owns The Habit Burger Grill, but we don't drive by many of those here in Florida.

Across its four restaurant chains, Yum! Brands has over 57,000 dining locations worldwide, as of the third quarter of 2023. That's actually more than fast-food titan McDonald's(NYSE: MCD), which had almost 41,200 as of its third quarter.

Therefore, while McDonald's is the largest single restaurant chain in the world, Yum! Brands is the larger restaurant company because it has nearly 16,000 more overall locations across its four main brands.

Yum! Brands is bigger than McDonald's. Therefore, one would expect the former to generate more revenue than the latter. But as the chart below shows, that's not the case at all. And the explanation has absolutely nothing to do with food.

YUM Revenue (TTM) Chart

YUM Revenue (TTM) data by YCharts

McDonald's ultra-reliable revenue source

Yum! Brands franchises about 98% of its 57,000 locations, whereas McDonald's only franchises about 95%. This does account for some of McDonald's higher revenue compared to Yum! Brands. But this isn't even close to the biggest differentiator.

To clarify, when a restaurant makes a sale at a company-owned location, the entire sale counts as company revenue. By contrast, when a restaurant makes a sale at a franchised location, only a small percentage of the sale counts as company revenue -- the franchise fee.

However, the big difference between Yum! Brands and McDonald's isn't the number of franchised locations versus company-owned locations. The big difference is that McDonald's owns a ton of real estate whereas Yum! Brands owns comparatively little.

This real estate ownership disparity is reflected on the respective balance sheets for each company. Yum! Brands has gross property, plant, and equipment of $2.5 billion. McDonald's has $42 billion.

From this enormous real estate portfolio, McDonald's charges rent to its franchisees -- a massive and incredibly reliable revenue source.

And when I say "massive," I mean it. In 2022, McDonald's generated just over $9 billion in revenue from charging its franchisees rent. For perspective, this accounted for 39% of the company's total revenue.

By comparison, Yum! Brands generated just $124 million in property revenue in 2022. Therefore, McDonald's real estate generates 73 times more revenue than real estate for Yum! Brands. And that's the big differentiator between these two businesses.

What it means for investors

McDonald's can boost its revenue and profits by increasing its rents over time. This appears to be what's happening. Through the first three quarters of 2023, the company has generated rent revenue of $7.3 billion. That's up 9% from the comparable period of 2022.

McDonald's needs to be careful when doing this -- raising rents too high can be unsustainable for its franchisees. But it's a growth lever always at its disposal.

The greater takeaway, however, is that McDonald's may be a more stable company than Yum! Brands. Over the last decade, both companies have seen diluted earnings per share (EPS) periodically pull back from highs. But pullbacks from Yum! Brands have been more extreme than those for McDonald's.

MCD EPS Diluted (TTM) Chart

MCD EPS Diluted (TTM) data by YCharts

I'm not necessarily saying that this means that McDonald's stock will be a market-beating investment going forward. In fact, it's underperformed the S&P 500 over the last five years.

However, the stability provided by its real estate empire could make McDonald's a solid component of a stock portfolio, with shares capable of providing positive returns and strong dividend growth. That could make it an attractive buy for some investors. And it's a good reason for current shareholders to continue holding.

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Jon Quast has positions in Driven Brands. The Motley Fool recommends Restaurant Brands International. The Motley Fool has a disclosure policy.

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