Arcos Dorados: McDonald’s, But Cheaper With Better Growth

Key Points

• Arcos Dorados is McDonald's largest independent franchisee and the largest restaurant operator in Latin America. 
• It is growing at double the pace of its parent company and accelerating its store count growth. 
• The value and dividend make it attractive for income and dividend growth investors who can tolerate emerging market risk. 

McDonald’s NYSE: MCD is a great stock, but investing in MCD directly isn't the only way to buy into its success. With Arcos Dorados NYSE: ARCO, you can get MCD exposure for cheaper and with a more robust growth outlook.

Arcos Dorados is the brand's largest independent franchise operator and restaurant chain in Latin America, leading with growth and accelerating its store openings. Surely, it comes with risks, but those are offset by the company’s health and the brand it represents, which is well-established, trusted worldwide, and growing.

ARCO stock trades at a deep value to McDonald’s -- near 10x this year’s earnings outlook and 10.5x next year’s with an outlook for accelerating results. McDonald’s trades more than double the valuation at 22x this year and 20.5x next year’s earnings consensus, and its business is growing at half the pace. 

The MCD dividend is a bit better than ARCO; the yield is worth 70 basis points more annually, but it has a less robust outlook for distribution growth. McDonald’s is unlikely to curb distribution increases or cut them out, but its 55% payout ratio is far higher. The takeaway is that Arcos Dorados' dividend may not match up to MCD now, but it will over time, and that is another value driver for shareholders. 

 

Arcos Dorados Had a Robust Quarter, Gives Positive Outlook

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