Fries and Coke go terribly well together.
McDonald's (NYSE: MCD) and Coca-Cola (NYSE: KO) are among the strongest and most pervasive corporations in the world. On the one hand, being market leaders in mature industries means it's not easy for them to find growth opportunities. On the other, both are remarkably solid choices for dividend investors looking for reliable cash payments. But which is a better buy right now: McDonald's or Coca-Cola?
What McDonald's and Coca-Cola have in common
Growth tends to naturally slow down as a company gains size over time, and businesses such as McDonald's and Coca-Cola have reached gargantuan scale. Also, consumers around the world are increasingly conscious of the importance of a healthy diet, which is a major challenge for companies selling fast food and soft drinks.
McDonald's launched its all day-breakfast menu in the U.S. in October, which turned out to be a major victory for the company, helping McDonald's to deliver a 5% increase in global comparable sales during the fourth quarter and a surprisingly strong increase of 5.7% in comparable sales in the U.S. Total worldwide sales in U.S. dollars still declined by 5%, though, mostly due to foreign currency depreciation relative to the greenback. Whether the company can sustain growing sales via further innovation still remains to be seen, but it's good to see that McDonald's can still produce sales increases in a highly penetrated market such as the U.S.
Coca-Cola is also seeing revenues decline in U.S. dollars, but its organic revenue grew 4% in 2015, and management is targeting an increase of 4% to 5% in organic revenue for 2016. Both traditional and diet sodas are under pressure, so Coca-Cola is betting on still products such as water, sports drinks, tea, and juice to accelerate growth. Sales volume in its stills portfolio grew by a healthy 5% last year, and it now represents nearly 25% of total revenue. The company is also implementing a $3 billion productivity program which is reducing costs and allowing Coca-Cola to expand profit margins over time.
Coca-Cola and McDonald's are among the most respected dividend stocks in the market, and for good reason, since they offer impressive trajectories of dividend growth over the long term. McDonald's has raised its dividends over the last 40 consecutive years and Coca-Cola has accumulated 53 years of uninterrupted dividend growth under its belt. Interestingly, the two companies are priced at fairly similar levels, not only in terms of dividend yield, but also when it comes to other measures such as price-to-earnings and price-to-sales ratios.
| Company | P/E Ratio | P/S Ratio | Dividend Yield |
|---|---|---|---|
| McDonald's | 26 | 4.26 | 3.04% |
| Coca-Cola | 25 | 4.31 | 2.98% |
Data Source: Finviz.
McDonald's or Coca-Cola?
McDonald's and Coca-Cola offer some striking similarities: They are market leaders in their respective industries, benefiting from tremendous scale and powerful brands. Both are also facing slowing growth lately, and have rewarded investors with consistently growing dividends over the long term. In addition, Coca-Cola and McDonald's are trading at remarkably similar valuations.
The fact that McDonald's has been able to jump start growth in the U.S. with initiatives such as all-day breakfast is a major plus for the company. However, it's hard to tell if McDonald's can sustain this momentum into the future. Consumers around the world are increasingly inclined toward healthier and more natural foods, even if McDonald's is making a big effort to adapt its menu to the new trends, the company is not well positioned to fight that battle. McDonald's has a really bad reputation when it comes to health and calories, and changing that image would be a herculean task.
Coca-Cola is certainly being hurt by declining soda demand in developed markets; even diet sodas are now under lots of scrutiny because of consumers' concerns about the possible health impacts of artificial sweeteners. On the other hand, it will be easier for Coca-Cola to adapt to new industry trends with products such as water, tea, and juice. Coca-Cola has the marketing firepower and brand recognition to successfully introduce and promote healthier products, and the company's massive distribution network is a huge advantage in this area.
McDonald's and Coca-Cola are not very different in terms of their strengths, valuations, and even the problems they are facing, so it's a close call. However, Coca-Cola looks better positioned to accelerate growth with healthier products in the future, so I´m picking the soft drinks colossus over the fast food giant.
