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Fast Food Restaurants

COVID-19 (or coronavirus), oil price wars, and transportation restrictions will negatively impact demand for most restaurant companies. In fact, in some states demand will drop by high-double digit rates, at least for a short time period. This will lead to lower top lines that, in turn, will impact the bottom lines. Cash flow will also be impacted. The dividends of some companies will be at risk. The fast food part of the restaurant sector may have dividend cuts. Liquidity is king right now for most restaurant companies. Companies with cash, equivalents, and marketable securities in the balance sheet and access to a revolving credit line should be able to make it through the turmoil. From this perspective, large-cap companies such as McDonald’s (MCD) and Starbucks (SBUX) should be able to weather the storm. In fact, both companies remain open to a limited extent (dining rooms are closed) and are operating their drive-thrus, mobile take-outs, and delivery in many places. Smaller companies are more at risk for a dividend cut.

Fast Food Restaurant Dividend Risk

But with that said, it is possible that the dividend is at risk even for large companies such as McDonald’s and Starbucks, depending on the length of crisis and the resulting drop in sales. One only has to look at the recent dividend cut from Marriott International (MAR) to realize that this is a distinct possibility if sales drop enough. From this perspective, Starbucks announced that Q2 2020 same-store sales would drop by about 50% in China alone. The company also said business was affected in Japan, South Korea and Italy due to store closures and reduced customer traffic. However, about 90% of Starbucks stores in China are now open again, albeit with modified hours, indicating that companies are trying to return to normal and that Q3 2020 should be better. Along the same lines, McDonald’s closed about 300 restaurants in China. Currently, restaurants are closed in some countries, but a high percentage of stores are now open in China and Japan. In either case, the loss of sales in the U.S. will have the largest impact on both companies. Currently, the magnitude and duration of the sales decline are largely unknown…

Disclosure: I am long MCD and SBUX.

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