Their businesses are growing, but a look at their stock prices over that past few months would indicate that investors have decided to ignore both McDonald's (MCD -0.91%) and Coca-Cola (KO) stocks. The two Dow dividend giants didn't participate in the 2023 stock market rally, in fact, and trail the S&P 500's 18.8% performance by 10 and 26 percentage points, respectively, through early December.
They'll be back. Despite some short-term growth challenges, Coke and McDonald's are likely to continue setting annual earnings records well into the future. With that bright outlook in mind, let's look at which of the two stocks is a more attractive option for patient investors today.
Coke is growing
Both companies managed to boost sales in a tough consumer spending environment, but Coke came out ahead in the growth arena. Revenue in the most recent quarter was up a robust 11% year over year, thanks to rising prices and increased sales volumes. It helps that the beverage titan owns several of the world's biggest soda brands and dozens of other hit products spread through niches such as sparkling waters, energy drinks, and teas. Coke's massive global infrastructure also makes it nearly impossible for rivals to challenge its market share.
McDonald's expanded its comparable-store sales by 9% last quarter, reflecting strong growth in most of its major markets. Yet customer traffic dipped into negative territory in the core U.S. segment in Q3. The fast-food chain is working on a rebound, in part by stressing its value menu options. But investors will want to watch that metric for improvements over the coming quarters.
McDonald's is setting records
Another great reason to like both stocks is that the businesses improved on their already industry-leading profit margins. Coke's operating income ticked up to 30% of sales last quarter, or roughly double that of rival PepsiCo. This success reflects its pricing power and the company's highly efficient business. Coke also benefits from a more focused portfolio that centers on on-the-go beverage sales, whereas Pepsi also maintains a large snacks and meals segment.
Yet investors will prefer the financial strength of McDonald's over Coke. The fast-food titan not only boosted its margin in 2023, but its blazing 46% rate is also an all-time high for the business. Investors had thought the chain was essentially done increasing its profit margin following a refranchising program that wrapped up before the pandemic struck. But the combination of strong customer traffic and rising prices has unlocked another level of earnings expansion for the burger seller.
Price and cash flow
The most appealing business in the world won't be a very positive force in your portfolio if you pay too high of a price for it. The good news is that investors aren't taking on huge risks in shelling out for McDonald's or Coke right now. The fast-food giant is valued at 8.4 times annual sales, which is elevated compared with its industry peers, to be sure. But that premium is below the over 9 times sales that investors were paying for the stock at a few other points in 2023.
Coke's discount is even more pronounced. You can own shares today for 5.6 times sales, down from a P/S ratio of 7 in early 2023. Coke also delivers a meatier dividend yield of 3.1%, compared with 2.3% rate at Mickey D's.
Overall, then, Coke seems more attractive for its faster growth, higher dividend payout, and lower valuation. While investors won't regret owning either stock over the long term, the beverage giant is likely to deliver better returns from here.
