Shake Shack vs McDonald’s

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I have been doing some research on stocks in the restaurant business, primarily a restaurant group in South Africa that has a new chain of restaurants similar to Shake Shack (the US custom made burger chain stock, which had a very successful IPO). While I am very excited about the prospects of this particular stock, the aim of this post is not to discuss that. What my research caused me to think about, was what the quickest route to becoming a Dividend Tycoon is?

This was also prompted by reading a few books on Coca-Cola and understanding what would have happened had you got in on the ground floor of that company. Even buying the stock 40 years after the stock went public, when it already blanketed a large part of the world, would have made you incredibly wealthy had you bought a fair amount and held it for 25 years. This led me to think about the prospects for Shake Shack which is relatively small still, but could have the potential to be vastly bigger in time to come, perhaps also spreading to most countries in the world. It is very popular and has a loyal following. The problem, dividends will take a while to flow. McDonald’s on the other hand has a proven model and the dividends grow each year. The problem, McDonald’s is mature and is already in most countries, hence future growth will be slower. However, I do believe that if one buys McDonald’s at a reasonable valuation, it could be a cornerstone of a Dividend Tycoon portfolio, you are essentially a part owner of over 35000 restaurants around the world.

So the dilemma to me is do I buy the potential next Coca-Cola or Starbucks, or do I stick to the slow and steady stock? Well for me I am not prepared to pay very high valuations (over 30 P/E), or for stocks not making a profit yet, no matter what the potential may be. A key to becoming a Dividend Tycoon is to not lose money, and should the company not live up to expectations, this is what may happen.

My approach to this particular sector, is to look for stocks which have been around a while, that are on reasonable valuations, that pay a dividend, but still have a growth kicker left. An example of this would be a restaurant group that starts a new line of business in a growth area, while still harvesting the cash flows of the original business. I believe I have found such a company in South Africa, but a good example would have been McDonald’s, which used to own 90% of Chipotle Mexican Grill. Now, they sold their stake in Chipotle in 2006 for $1.5bn dollars, and today Chipotle has a market value of $14bn, so the sale has been deemed by most to be a big mistake, as Chipotle has gone on to great success. The key though is to look for other stocks which have quietly gone about exploring growth avenues, while keeping the original cash cow intact. McDonald’s invested in Chipotle when it had less than 20 locations, and built it up to over 500.

What I am trying to say is that there is a difference to being a Dividend Investor (and there are countless sites which can help you on that path) and being a Dividend Tycoon. Becoming a Dividend Tycoon requires a bit more work, a bit more research, a bit more digging into filings and presentations and reading company reports. But, should you find a gem, which multiplies like a Starbucks over 20 years, you will be certainly glad you did.

*Please note that I am not an investment adviser and do not recommend or advise against any stocks mentioned, please do your own research.

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