If you are looking for high-return consumer food businesses, you've likely come across both fast-food giant McDonald's (MCD 0.18%) and the spice and flavorings specialist McCormick (MKC -0.32%). They don't compete in the same niche, but these companies share attractive investment characteristics like global industry leadership, impressive profitability, and growing dividend payouts.
Their stocks have stuck close to the broader market's return into late 2020, suggesting that Wall Street doesn't see a clear reason why one might outperform the other over the next few quarters. But there are a few factors that point to McCormick as the better share purchase today.
Better industry dynamics
McDonald's came into the pandemic with a slightly stronger growth profile, growing at a 6% clip in 2019, compared to McCormick's 3% uptick. But the coronavirus has reshaped the two companies' relative prospects. McCormick has raised global sales by 6% through the first three quarters of 2020 while boosting adjusted operating income by 9%. McDonald's has endured a 12% sales decline in that time while operating income is down 23%.
Sure, most of that pressure will disappear as vaccines help eliminate the pandemic risk over the next few quarters. The fast-food giant even returned to growth in the core U.S. market despite simmering outbreaks in many parts of the country.
But it's likely that the restaurant industry will be highly competitive in 2021 even under optimistic scenarios for a rebound in economic growth. McDonald's promotion plans will go up against rivals like Starbucks, Chipotle, and Shake Shack, which are all pouring cash into their drive-thru platforms and seeking market share advantages. McCormick doesn't face quite as much heat from competitive spice and flavorings makers.
More cash returns
McCormick is also in a better position to boost direct shareholder returns over the next few years through dividends and stock buybacks. Its surging cash flow has allowed it to maintain a flexible debt level even as it pays down bonds it took on to fund its acquisition of the French's and Frank's condiment and sauce franchises.
Given the risks to global economic growth and COVID-19 outbreaks, CEO Lawrence Kurzius and his team have taken a conservative approach to allocating that extra cash. That posture could mean there's more room to dramatically boost cash returns in 2021 or to target additional game-changing acquisitions. As a result, investors could get more direct cash from McCormick over the next few years even though McDonald's stock has the higher dividend yield today.
Eating out or staying home
One big growth question is whether consumer demand will settle at higher eat-at-home rates after the COVID-19 threat passes. That move would contribute to difficult selling conditions for the restaurant industry while boosting sales in McCormick's food prep niches. Don't forget that the company also maintains a restaurant supply business, which would expose it to a rebound even as its core spice segment keeps growing.
Put it all together, and McCormick seems to have a clear path toward getting back to management's growth goals of roughly 5% annual sales gains in the context of rising profitability and increasing dividend payments. That's a formula for solid long-term investor returns that make it a bit more attractive than the fast-food leader right now.