Yahoo Finance Why McDonald's minimum wage hike is surprisingly good news for the stock
Long-time minimum wage fan McDonald's is hiking hourly wages and it may not be such bad news for investors, even though their initial reactions suggest otherwise.
The land of 550-calorie Big Macs said Thursday it will raise hourly wages "by an average of 10%" for more than 36,500 employees at more than 660 company-operated U.S. restaurants. That will take the entry-level range for crew to at least $11 - $17 an hour. Starting wages for shift managers will go to at least $15 to $20 an hour.
The pay increases will be phased in over the next several months.
"In this highly competitive market for talent, successful employee recognition, recruitment, and retention is fundamental to drive growth," said McDonald's U.S. President Joe Erlinger in an internal memo obtained by Yahoo Finance.
Erlinger encouraged McDonald's franchisees to follow suit on wages.
"As we said in our recent system webcast, we encourage all owner/operators to make this same commitment to their restaurant teams in ways that make the most sense for their community, their people, and their long-term growth," Erlinger said.
The news out of McDonald's comes hot on the heels of rival Chipotle lifting starting hourly wages to $15 an hour this week.
The announcements from two of the largest chains (and others in corporate America, such as Amazon on Thursday) — which reflect the labor shortage amid the economic rebound from the pandemic — have spooked investors in restaurant stocks. The view: higher wages will mean lower profits for the always competitive industry.
Shares of McDonald's and Chipotle are down 2% and 6.5%, respectively, over the past five sessions, according to Yahoo Finance Plus data. Wendy's stock is down slightly, while Burger King owner Restaurant Brands has shed 3.5%, likely as investors prepare for wage increase news from each.
But analysts Yahoo Finance have talked with suggest that thesis isn't entirely correct, provided one has a longer term investment horizon. Their bull case thesis on restaurant stocks right now is rooted in several things.
First, the industry's wage increases puts more money in the pockets of lower income consumers who are usually the diners that fill the cash registers at fast food restaurants. Two, the wage increases and the rebounding job market will likely nudge consumers to spend their savings. And those savings look substantial: Moody's Analytics recently estimated consumers have amassed an extra $5.4 trillion in savings during the pandemic.
While analysts agree restaurant companies likely see a short-term hit to profits from the wage increases, profits later this year and into 2022 could surge due to the aforementioned macroeconomic dynamics. Hence, there are buying opportunities to be had in the sector on their latest pullbacks, analysts say.
Time will tell. In the meantime, pass the Big Mac before its price inflates.
Yahoo Finance's Michael Kelley contributed to this story.
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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