McDonald's Ready to Serve

Hopes are high heading into a two-day analysts meeting.
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They were already expecting a higher dividend and a new buyback authorization. Now

McDonald's

(MCD) - Get Report

shareholders face the potentially lucrative prospect of an activist hedge fund pressuring the company into selling undervalued assets.

With a two-day analysts' meeting starting Wednesday in Oak Brook, Ill., investors have reason to be optimistic about the burger giant's future, even after the shares have doubled since its latest turnaround began in early 2003.

Perhaps most importantly in the near term, McDonald's and its fast food peers, like

Wendy's

(WEN) - Get Report

and

Yum! Brands

(YUM) - Get Report

, could benefit from a slowdown in discretionary consumer spending.

Before Hurricane Katrina struck the Gulf Coast, concerns about consumers, particularly at the low end, were already widespread thanks to high oil prices and debt levels. In the wake of the storm, along with the inflationary pressures it unleashed, the rhetoric has shifted to describe a drop in discretionary spending as inevitable.

That's bad news for most restaurant chains, particularly those concentrated in the Southeast that are dealing directly with the storm's aftermath. Morningstar analyst Carl Sibilski said restaurant companies like

Outback Steakhouse

(OSI)

,

Brinker International

(EAT) - Get Report

,

Sonic

(SONC)

,

CKE Restaurants

(CKR)

,

Jack In The Box

(JBX)

,

IHOP

(IHP)

and

Darden Restaurants

(DRI) - Get Report

all stand to lose customers.

Diners looking to pinch pennies will probably wind up perusing the dollar menus at the nearest fast-food joint, like McDonald's and Wendy's.

"We also expect to see declines in average check size, particularly at casual dining restaurants, as consumers choose less-expensive entrees or drinks in an effort to curtail spending," Sibilski wrote in a recent research note.

He noted that

Applebee's

(APPB)

has already reported traffic declines at its restaurants as consumers cut back on early-week and weekend lunches in the face of a spending crunch.

In addition to whatever benefits are enjoyed by fast-food investors due to macroeconomic trends, McDonald's, Wendy's and Yum! Brands all have shown signs that returning value to shareholders is becoming a priority.

Pershing Square Capital recently bought a 4.9% stake in McDonald's, according to

Bloomberg

. That's the same activist hedge fund that browbeat Wendy's into several shareholder-friendly moves earlier this summer, including selling part of its Tim Hortons doughnut chain and authorizing a $1 billion in share repurchases.

Shares of Wendy's gained 12% and hit an all-time high in July after the moves were announced. Last month, the company said it would close up to 60 underperforming restaurants, slow new-store development and sell more U.S. outlets to franchisees. On Monday, it announced that its president and chief operating officer resigned.

Pershing owned 9% of Wendy's stock when it called for the changes. Its stake in McDonald's is smaller, but analysts say similar moves could be made at the world's largest burger chain in order to boost its shares. For instance, McDonald's could sell off its Chipotle and Boston Market subsidiaries or sell company-owned stores to franchisees.

Shares of McDonald's jumped more than 5% last week after

Bloomberg

broke the story of Pershing's stake (its reported 4.9% stake is just below the 5% threshold that necessitates disclosure with the

Securities and Exchange Commission

). Now, Wall Street is trading in anticipation of what sort of bombshells, if any, the company might drop at its upcoming analysts' meeting.

Yum! Brands, which operates KFC, Pizza Hut and Taco Bell, among other fast-food chains, said Monday its board of directors approved a 15% increase in its quarterly dividend. Its shares currently yield 0.9% annually.

The focus on returning cash to shareholders comes as the fast-food industry appears to be reaching maturity in North America. Companies see more growth opportunities abroad, but most of the potential for domestic growth comes from stealing market share, cutting costs and raising average ticket sales.

"Given

McDonald's market penetration, we think sales growth will average no better than the low single digits in the long term," Sibilski said. He also stressed that restaurant chains facing headwinds from Hurricane Katrina still have a bright future in the long term, saying "gas prices will revert to the mean next year" and "a sell-off in restaurant stocks in the short term would be a good buying opportunity."