While they aren't direct competitors, McDonald's (MCD 0.05%) and McCormick (MKC +0.68%) share some attractive similarities as investments. Each company is a leader in a global industry and owns a valuable brand that has been built up over many decades.
Financially speaking, both consumer-focused giants boast unusually strong cash flow and are members of the exclusive club of income investments known as Dividend Aristocrats.
But if you had to pick one as the better purchase today, which stands out as the stock to buy? Let's take a closer look.
Image source: Getty Images.
Short-term challenges
In today's pandemic-influenced economy, McCormick looks like the clear favorite when it comes to the short-term growth outlook. Sure, the spice and flavorings giant counts restaurants, which are under strain while COVID-19 depresses demand for their services, as key customers. But its bigger operating segment caters directly to consumers, who have been ramping up their at-home cooking time in recent months and might be continuing that habit well into 2021.
McCormick's sales jumped 10% in the most recent quarter, compared to a 5% decline at McDonald's. The fast-food giant's Q2 report, which covers the April, May and June selling months, will probably show even rougher results, with sales likely down by more than 25%.
McDonald's for the win
Look past that likely short-term speed bump, though, and most other factors support McDonald's as the stronger investment today. The fast-food titan enjoys roughly double McCormick's profitability, with operating margin reaching over 40% thanks to its ultra-efficient operating model. The franchise setup also helps deliver far better return on invested capital (22% compared to McCormick's 9%) and cash flow (up 36% last year compared to McCormick's 15% increase).
MCD Return on Invested Capital data by YCharts.
McDonald's pays a higher yield, too, with a dividend equating to 2.5% annual cash returns compared to McCormick's 1.3%.
The spice and flavorings giant has McDonald's beat when it comes to overall earnings growth over the past decade. While the burger slinger's net income isn't much higher today than it was in 2010, McCormick's earnings haul has more than doubled. Yes, management purchased much of that increase by acquiring the French's and Frank's condiment brands. But that success does suggest that there's more potential for game-changing growth ahead for McCormick's, while McDonald's can only achieve modest increases in its mature industry.
Riding out the pandemic
Still, in a potentially rocky economic environment that could last several quarters or even years, McDonald's looks like the safer bet. The blue chip giant's massive global presence and dominant financial strength have served shareholders well through big challenges over the past few decades, including the recent rise of fast-casual competition.
Mickey D's adjusted to that threat by boosting its appeal across the value spectrum and pouring cash into high-return areas like store remodels, menu upgrades, and the digital sales channel. Those assets and resources won't protect the chain from short-term hits like the one that sent revenue lower during COVID-19's initial global outbreak. But they do suggest that McDonald's will quickly bounce back from such challenges, in most cases with an even stronger market share position.
