Fast Food Restaurant Dividends May Be At Risk

The impact of COVID-19, oil price wars, and transportation restrictions has led to a rapid and unprecedented economic slowdown.
Some companies are already freezing or cutting the dividend at least for on a temporary basis.
I analyze the dividend safety of the fast food restaurant sector, including McDonald’s, Starbucks, Restaurant Brands International, Yum! Brands, Wendy's, Dunkin’ Brands, and Domino’s Pizza.
Introduction and Thesis
COVID-19, 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.

(Source: Uber Eats)
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... Read more