In the realm of burgers and burritos, two companies reign supreme: McDonald's Corporation (NYSE:MCD) and Chipotle Mexican Grill (NYSE:CMG). These two stocks offer different things for investors. McDonald's stock is valued similarly to the overall stock market, and it pays a juicy 3.5% dividend. Meanwhile, Chipotle doesn't offer a dividend, but it's growing at very high rates and has richly rewarded its investors with massive stock gains over the past several years.
But each stock has its share of negatives as well. On one hand, McDonald's fundamentals are deteriorating, and its revenue and earnings have been in decline. On the other hand, Chipotle holds a very rich valuation. If its future growth rate slows, its valuation multiple could contract, which might leave investors with some painful losses.
For these reasons, I believe Jack in the Box (NASDAQ:JACK) offers a great blend of both McDonald's and Chipotle's better qualities.
Growth at a more reasonable price
Chipotle is highly regarded as a premier growth stock. There's good reason for this, as the company's comparable-restaurant sales jumped 16% year over year in 2014. Earnings per share rose 35% last year. However, Chipotle got off to a slower start this year. Comparable-restaurant sales grew 10% in the first quarter.
That was still a strong number, but nevertheless it represented a slowdown from previous quarters. Chipotle's first-quarter results missed analyst expectations and the stock tanked by 5% following its earnings report. This brings to light Chipotle's aggressive valuation. The stock trades for 31 times forward earnings estimates, which is a concern if growth continues to slow going forward.
On the other hand, Jack in the Box's growth is still accelerating. It owns both its namesake Jack in the Box chain, as well as Qdoba. Comparable-restaurant growth at Jack in the Box and Qdoba clocked in at 1.9% and 2.3%, respectively, in the fiscal quarter ended Jan. 18. Its same-restaurant growth then significantly accelerated, to 8.9% at Jack in the Box and 8.3% at Qdoba in the most recent quarter.
Even better, Jack in the Box is less aggressively valued than Chipotle, at 25 times forward EPS estimates. This could set up investors for strong gains if earnings reports over the remainder of the year are as strong as its most recent quarterly performance.
Jack in the Box's delicious dividend growth
As previously mentioned, one of the best reasons (and possibly the only reason) to own McDonald's stock is its strong dividend. McDonald's is in decline -- its earnings per share fell 23% year over year last quarter. Comparable restaurant sales fell 2.6% in the U.S., 0.6% in Europe, and 8.3% in the Asia-Pacific, Middle East and Africa region. This was even worse than its performance in 2014, in which comparable sales fell 1% worldwide.
But McDonald's is still highly profitable, which allows it to keep raising its dividend. In fact, McDonald's has raised its dividend each year since the first dividend was paid in 1976, a streak amounting to 38 years. That qualifies McDonald's as a Dividend Aristocrat, which is an exclusive club of companies that have increased their payouts for at least 25 years.
But as McDonald's revenue and earnings decline, its dividend growth rate has declined as well recently. Its last two dividend raises were only 5% each. In the five years preceding those raises, the company had increased its payout by 15% per year. As a result, while McDonald's is a good pick for income right now, it's not as sure of a bet for dividend growth.
For dividend growth, Jack in the Box is a much better pick. The company is in high-growth mode, which allows it to increase its dividend at very high rates. For example, Jack in the Box recently raised its dividend by 50%. The stock yields 1.3% right now, but its dividend could quickly catch up to that of McDonald's with high double-digit increases each year.
The Foolish bottom line
While Chipotle's growth has slowed in recent quarters, and McDonald's dividend is standing still, Jack in the Box is getting stronger by the quarter. It offers much higher growth than McDonald's, while the stock isn't nearly as expensive as Chipotle.
As a result, Jack in the Box could be a better pick for share price gains than Chipotle. And, it could also be a better income stock than McDonald's over the long-term. For the best burgers and burritos stock to buy, go with Jack in the Box.