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Better Buy: McDonald's vs. Coca Cola

By Leo Sun – May 26, 2020 at 9:20AM

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Which iconic American brand is a better investment?

McDonald's (MCD -0.89%) and Coca-Cola (KO -0.29%) are two of the most iconic brands in America. They're also both Dividend Aristocrats -- members of the S&P 500 that have raised their dividends for at least 25 straight years.

Over the past decade, McDonald's and Coca-Cola generated total returns of about 265% and 140%, respectively, making them sound long-term investments. However, both companies face new challenges as health-conscious consumers shun fast food and sugary sodas. So are McDonald's and Coca-Cola still great stocks to "buy and forget" for the next few decades? 

A glass of cola being poured with a burger and fries in the background.

Image source: Getty Images.

How McDonald's and Coca-Cola are evolving

McDonald's and Coca-Cola are evolving to attract new consumers. McDonald's introduced an all-day breakfast, added healthier options like oatmeal, wraps, and salads, experimented with regional menu items, posted calorie counts for all its products, and renovated and upgraded its stores with digital kiosks.

Coca-Cola expanded its portfolio beyond sugary sodas by acquiring or developing new brands of bottled water, juice, sports drink, tea, and coffee. It also developed new beverages -- like Coca-Cola Coffee, Coca-Cola Energy, and alcoholic drinks -- and sugar-free versions of its top sodas.

Understanding their business models

Most of McDonald's restaurants are franchised. This model boosts its margins, since franchisees shoulder the overhead costs while paying fees and royalties to the company, but it can also result in quality control issues.

Coca-Cola has had different business models during its history, sometimes owning its bottling operations and sometimes using the higher-margin business strategy of having independent bottlers buy its concentrated syrup and assume the costs of packaging and selling the finished drinks. Currently, Coca-Cola doesn't own or control most of its bottling system.

Which company is growing faster?

McDonald's global comparable store sales rose 5.9% in 2019, marking its strongest growth in over a decade. It attributed that growth to new initiatives, including a new value menu, fresh beef, delivery options, and digital upgrades for its stores.

A McDonald's in Madrid Airport.

Image source: Getty Images.

In the first quarter, which ended on March 31, McDonald's global comps declined 3.4% as the COVID-19 crisis shut down its restaurants. It also withdrew its guidance for the full year. But during the conference call, CEO Chris Kempczinski noted McDonald's global deliveries were "up significantly versus pre-COVID," and said the company would "further extend its leadership in every market" after the crisis ends.

Analysts expect McDonald's reported revenue and earnings to decline 14% and 27%, respectively, this year -- but investors should take those forecasts with a grain of salt, and focus more on its global comps growth throughout the crisis.

Coca-Cola's organic sales grew 6% in 2019. It attributed that growth to strong demand for "mini cans" of Coca-Cola, robust sales of non-carbonated brands like Fuze Tea and NutriBoost, and new regional marketing campaigns. It also expects its acquisition of Costa Coffee to form the foundation of a "world class" coffee business.

Coca-Cola's organic sales stayed flat in the first quarter, which ended on March 27. It attributed the slowdown to the pandemic's disruption of "away-from-home" channels (like restaurants), which generate roughly half its total revenue.

Coca-Cola didn't provide any guidance for the rest of the year, but CFO John Murphy said the company was positioning itself "to win in the post-COVID world" by cutting costs across the board. Wall Street expects Coca-Cola's reported revenue and earnings to both decline 11% this year, but its organic sales growth could suffer milder declines.

The dividends and valuations

McDonald's and Coca-Cola both recently suspended their buyback plans to conserve cash, but neither company plans to interrupt its dividend. McDonald's currently pays a forward yield of 2.7%, while Coca-Cola pays a forward yield of 3.6%.

McDonald's stock trades at 31 times forward earnings, while Coca-Cola has a lower forward P/E of 23. Neither stock is cheap relative to its near-term earnings growth, but both stocks are still safe defensive plays in this volatile market.

McDonald's and Coca-Cola are still solid long-term investments. However, Coca-Cola's lower valuation, higher yield, and more diverse portfolio make it a better overall buy.

 

Leo Sun has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

McDonald's Corporation Stock Quote
McDonald's Corporation
MCD
$232.31 (-0.89%) $-2.09
The Coca-Cola Company Stock Quote
The Coca-Cola Company
KO
$56.41 (-0.29%) $0.17

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