McDonald's (MCD 0.37%) and Home Depot (HD 0.74%) have been key members of the Dow Jones Industrial Average since the mid-80s. They dominate their respective industries with market-thumping sales and profits and have rewarded shareholders with a steadily growing dividend over many years.
But which of these blue chip giants is the better investment here in early 2023? Let's dive right in.
Sales trends
If you're focused solely on growth trends, McDonald's is the stock for you. In late January, the fast-food giant reported a blazing 12% spike in comparable-store sales, representing an acceleration compared to the previous quarter. Mickey D's is outperforming peers in an industry experiencing increased demand as consumers look for quick, affordable dining experiences.
On the other hand, Home Depot just announced a slight drop in comps for the fourth-quarter period that ended in late December. The home improvement giant is facing pressures from rising interest rates and a growth hangover related to soaring results in 2020 and 2021.
Weaker growth trends also show up in the customer traffic metric. McDonald's enjoyed rising traffic and higher average spending through late 2022. On the other hand, Home Depot reported a 6% drop in Q4 and a 5% decline for the full year.
Earnings and cash
Home Depot and McDonald's stocks both deliver market-leading financial efficiency. The fast-food titan's operating profit margin is over 40% of sales, well ahead of peers like Chipotle. The same holds true for Home Depot, whose 15% profit margin routinely outpaces Lowe's.
HD Operating Margin (TTM) data by YCharts. TTM = trailing 12 months.
Home Depot shines in the return on invested capital metric, which helps describe a company's efficiency along with management's ability to allocate capital. This success has allowed the company to shower its investors with direct cash returns through a rising dividend and aggressive stock buybacks.
And on the wider subject of cash returns, Home Depot takes the edge. Both companies raised their dividends by 10% for 2023, but the retailer will likely spend more on that payout and stock buybacks over the coming years, thanks in part to its less ambitious plans for increasing its footprint.
The better buy
As they compete in different industries, it isn't useful to directly compare valuations between Home Depot and McDonald's. But both are valued at premiums compared to their rivals. Home Depot is trading for over 2 times annual sales, for example, versus Lowe's 1.4 ratio. Meanwhile, McDonald's is valued at nearly 9 times annual revenue, compared to roughly 5 for peers like Chipotle and Restaurant Brands International. And McDonald's stock has risen over the past full year, while Home Depot's has modestly trailed the market's 6% decline.
Both companies will likely continue posting above-average operating trends, so each could be a good addition to your portfolio. McDonald's seems better suited for growth-focused investors. After all, Home Depot is projecting flat sales results in 2023 and could see another year of falling traffic.
McDonald's ability to boost traffic and average spending through a wide range of selling conditions, in contrast, helps explain why the stock is trading at an appropriate premium today.
