Oh, the times they are a-changing. When I was a kid, I looked forward to getting gift certificates from McDonald's (NYSE:MCD) in my stocking at Christmas and a summer barbecue wasn't the same without an icy cold Coca-Cola (NYSE:KO). Nowadays, health conscious consumers are increasingly driving past the fast food giant and pushing their cart past the soda aisle to healthier alternatives.
Still, there is a certain allure to holding these iconic companies in a well-diversified portfolio. Both companies are considered dividend aristocrats: members of the S&P 500 that have raised their dividend for at least 25 consecutive years. Each has stood the test of time and is attempting to add choices for the health-conscious consumer. Let's review a few financial metrics to determine which is the better place for investor money now.
The iconic beverage purveyor has sought to combat waning interest in soft drinks by focusing on its lower calorie offerings and soda alternatives such as tea, water, and juices. Coke has also been rolling out smaller portion sizes as a healthier option.
McDonald's has faced similar challenges from consumers making healthier selections and has responded by providing alternatives like wraps, salads, and fruit. The company has also focused on the quality of its coffee to attract consumers who might also pick up food.
The challenges facing both companies are evident in their most recent results. McDonald's revenue for the trailing 12 month period has dropped by nearly 3%, while Coke's has fallen by almost 6% over the same period. From an earnings standpoint, Coca-Cola's diluted earnings per share has plunged 18%, while McDonald's has risen more than 8% over the same period.
Time will tell if either will implement a successful turnaround strategy. While neither choice is particularly appealing, McDonald's revenue has fallen less and it has done more to reduce spending.
Winner = McDonald's
Dividends and share buybacks
Coca-Cola has paid a quarterly dividend since 1920 and has increased its dividend in each of the last 55 years. McDonald's paid its first dividend in 1976 and has raised its dividend in each of the last 41 years. Coke currently sports a higher dividend yield at just over 3%, with McDonald's just shy of 2.5%.
A dividend payout ratio between 55% and 75% is normally considered high, as it gives a company less flexibility and limits resources for future growth. McDonald's has a payout ratio over 63%, while Coca-Cola's exceeds 72%. While both are certainly sustainable over the near term, they could be in jeopardy if either company falters or faces long-lasting financial troubles.
Both companies have been buying back shares, and reduced their share counts over the last year. Coke reduced its shares by nearly 1% while McDonald's share count fell by almost 2%.
Coke's yield is slightly higher, while McDonald's has a lower payout ratio. Tipping the scales slightly to its advantage, McDonald's has bought back more shares.
Winner = McDonald's
Stock performance and valuation
Coca-Cola's share price has been essentially flat over the last year, having risen just over 1%. McDonald's stock has returned nearly 22% over the previous year, beating the broader market's 15% gain. Given Mickey D's stronger performance, you might expect it to possess a higher valuation, but that isn't the case. In terms of the price to earnings ratio, McDonald's is less expensive, at 26 times trailing earnings compared to Coke's 31 times trailing earnings.
This higher multiple indicates that investors believe Coke will succeed in its turnaround efforts and they are less convinced about McDonald's path. The future, however, should eliminate most of the difference. Coca-Cola's forward multiple is 24, only slightly higher than McDonald's forward valuation of 23.
McDonald's higher stock price returns and less expensive P/E ratio again give it the edge.
Winner = McDonald's
In the final analysis, I don't think either of these companies are going away, though near-term challenges remain. If an investor felt compelled to choose between the two, McDonald's holds a slight advantage in the metrics reviewed. However, neither is a screaming buy at this point given the current societal trends toward healthier options.