McDonald’s Corporation (MCD) had a decent day in the market Tuesday, as MCD stock popped on a trading desk rumor that activist investor Bill Ackman was taking a second run at shaking up the world’s largest restaurant chain.
MCD stock jumped as much as 2.6% to $90.75 at one point during the session. That’s a pretty heavy move for a component of the Dow Jones Industrial Average with a market cap of more than $87 billion.
There’s likely nothing to the rumor, however. There’s a saying that in Hollywood, the rumors are always true. On Wall Street, it’s pretty much the opposite. Sure, Bill Ackman was McDonald’s bete noire for a good two years between 2005 and 2007, acquiring a big stake in MCD stock and then pressuring the company to accelerate share buybacks and sell assets.
Bill Ackman eventually gave up that fight, selling his MCD stock stake, but his history with the burger chain helps make the new rumor travel well. In this case, the scuttlebutt is that Bill Ackman would have MCD spin off its real estate assets into a real estate investment trust (REIT).
The current fad of companies seeking REIT status probably helps fuel this rumor involving Bill Ackman and MCD stock, too. Companies from private prison operators to document management companies have recently become REITs because it confers certain tax advantages. Investors like them because REITs are required to pay out most of their earnings as dividends.
A REIT Push Won’t Help MCD Stock
The thing is, even if the rumor is true, MCD spinning off part of the company as a REIT does nothing to solve any of its problems. Financially, McDonald’s — and by extension MCD stock — is sound. The problem is that sales — particularly in the U.S. — are in a protracted slump.
A lot of that is due to much stiffer competition. On the one hand, there’s Chipotle Mexican Grill (CMG) and other so-called fast casual chains that offer fresher food and have a healthier reputation. On the other side, old-school fast food rivals like Wendy’s (WEN), Burger King (BKW) and Yum Brands’ (YUM) Taco Bell have upped their games.
As a result, MCD stock is off 8% for the year-to-date, vs. an 8% gain for the S&P 500. From pricing to promotions to messing with the menu to gimmicks, MCD management is working on a number of fronts to turn sales around. So far, not much has worked.
A better labor market and faster economic growth in general will certainly help, but it’s going to be a while before investors see any of these management initiatives take off — if they work at all.
One thing that is for certain, however, is that MCD sure doesn’t need the distraction of Bill Ackman telling it what to do again — especially something as mind-bogglingly complex as spinning off assets in a REIT.
For that reason alone, anyone holding MCD stock had better hope this whole Bill Ackman thing really is just a rumor, and nothing more. MCD has enough to deal with as it is.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
