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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.

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

I like to play a game with my kids when I’m driving down the road: Name the publicly traded company that owns each company. We pass a Take 5 car wash – which is owned by Driven brands. We pass a fire station – which belongs to International restaurant brands.

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

Through its four restaurant chains, Yum! Brands had more than 57,000 restaurants worldwide as of the third quarter of 2023. That’s actually more than the fast food titan. McDonalds (NYSE:MCD)which had nearly 41,200 in its third quarter.

Therefore, even though McDonald’s is the largest Single restaurant chain in the world, Yum! Brands is the largest restaurant business as it has nearly 16,000 additional locations in total across its four main brands.

Yum! The brands are bigger than McDonald’s. We might therefore expect the former to generate more revenue than the latter. But as the chart below shows, this is not the case at all. And the explanation has absolutely nothing to do with food.

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

YUM Earnings Chart (TTM)

McDonald’s Ultra-Reliable Revenue Source

Yum! Brands franchises about 98% of its 57,000 locations, while McDonald’s only franchises about 95%. This explains a few McDonald’s higher revenues compared to Yum! Marks. But that’s not even the biggest differentiator.

To clarify, when a restaurant makes a sale at a company-owned establishment, the entire sale counts as company revenue. On the other hand, when a restaurant makes a sale to a franchise establishment, only a small percentage of the sale counts as business income: the franchise fee.

However, the big difference between Yum! Brands and McDonald’s do not represent the number of franchised locations versus company-owned locations. The big difference is that McDonald’s owns a ton of real estate while Yum! Brands owns relatively few.

This disparity in real estate ownership is reflected in each company’s respective balance sheets. Yum! Brands has gross property, plant and equipment worth $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 source of income.

And when I say “massive,” I mean it. In 2022, McDonald’s generated just over $9 billion in revenue by charging rent to its franchisees. For comparison, this represented 39% of the company’s total revenue.

In comparison, Yum! The brands only generated $124 million in real estate revenue in 2022. So, McDonald’s real estate generates 73 times more revenue than real estate for Yum! Marks. And that’s the big differentiator between these two companies.

What this means for investors

McDonald’s can increase its revenue and profits by increasing its rents over time. This seems to be what is happening. During the first three quarters of 2023, the company generated rental income of $7.3 billion. This represents an increase of 9% compared to the comparable period of 2022.

McDonald’s must be careful in this approach: an increase in rents that is too high may be untenable for its franchisees. But it is a growth lever always at its disposal.

The takeaway, though, is that McDonald’s may be a more stable company than Yum! Marks. Over the past decade, both companies have seen their diluted earnings per share (EPS) periodically decline from peaks. But withdrawals from Yum! The brands have been more extreme than McDonald’s.

MCD Diluted EPS Chart (TTM)MCD Diluted EPS Chart (TTM)

MCD Diluted EPS Chart (TTM)

I’m not necessarily saying that this means McDonald’s stock will be a market-beating investment in the future. In fact, it underperformed the S&P500 over the last five years.

However, the stability provided by its real estate empire could make McDonald’s a solid part of a stock portfolio, with stocks capable of generating positive returns and strong dividend growth. This could make it an attractive buy for some investors. And that’s a good reason for current shareholders to continue holding.

Should you invest $1,000 in Yum! Brands at the moment?

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

Yum! Brands has 16,000 more restaurants than McDonald’s. But McDonald’s generates more than 70 times more revenue from this reliable source alone. was originally published by The Motley Fool

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