Income investors have made it clear that they are more optimistic about PepsiCo's (PEP 1.08%) business than McCormick's (MKC 1.68%) right now. Both companies enjoy strong market share positions in staple food brands, but Pepsi's shares are beating the S&P 500 over the past year while McCormick's are trailing the market.
McCormick recently updated investors about its early 2023 performance while issuing its latest outlook for the fiscal year. Let's see whether those trends make the spice and flavorings specialist a more attractive buy today.
Raising prices
McCormick still trails its larger peer when it comes to growth. Sure, sales trends accelerated to a 5% increase in Q1 compared to a 2% uptick in the prior quarter. And McCormick solved a few of its supply chain challenges and boosted market share. "Our record ... sales performance reflects the strength of our broad global portfolio," CEO Lawrence Kurzius said in a press release.
But PepsiCo posted a much stronger 15% spike in organic sales this past quarter. The beverage and snack foods giant has been able to pass along more aggressive price increases without sacrificing much in the way of sales volume. Both companies saw a 2% volume decline in the latest quarter, but the growth gap came from PepsiCo's bigger price hikes.
Profitability and cash flow
McCormick holds the edge on profitability. Like Pepsi, the company is still seeing shrinking profit margins due to soaring costs. But its current 14.5% operating profit margin comfortably surpasses PepsiCo's result.
MKC Operating Margin (TTM) data by YCharts
McCormick has a slightly brighter outlook in this area, too. Management is projecting weaker cost pressures through the rest of 2023, which should help earnings growth over the next several quarters. McCormick also divested a low-margin business roughly a year ago, and lapping that exit will provide a lift to sales growth and operating margin.
"We are addressing the pressure points from last year," Kurzius told investors.
Outlook and valuation
Both companies are projecting roughly 6% higher sales this fiscal year, and McCormick has a slightly better earnings outlook thanks to those moderating cost pressures. Its adjusted operating income should rise at a 10% rate, executives project, while PepsiCo is forecasting a roughly 8% increase.
Finally, income investors are getting a better payout from PepsiCo shares, which today yield 2.6% compared to 1.5% for McCormick. Both companies have steadily boosted their dividends for more than 20 years.
PepsiCo stock has a cheaper valuation at 2.9 times sales compared to McCormick's 3.2. That slight premium reflects investors' expectations that profitability will remain higher than PepsiCo's and will start climbing again starting in late 2023.
Still, PepsiCo looks more attractive as a dividend stock today. Rather than hoping for a business turnaround, shareholders can already see evidence of the company's pricing power, market share strength, and earnings ability. PepsiCo also pays a bigger dividend and is priced at a discount.
Both companies are likely to thrive through the next year even if a recession develops in key markets like the U.S. and Europe. But PepsiCo stock seems poised to deliver stronger long-term returns for investors from here.
