On the surface, IBM(NYSE: IBM) andMcDonald's(NYSE: MCD)may not seem like they have much in common. One is a veteran tech company, while the other is a fast-food giant.
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But for investors, the two have plenty in common. Both are Dow stocks and dividend aristocrats, meaning they've raised their dividends for at least 25 years in a row, and for that reason the two stocks are popular with income investors.
Today, as part of our "Better Buy" series, we take a look at two classic blue chip stocks to determine which one is the better choice.
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Not-so Big Blue
IBM shares have swooned over the last few years as the tech giant's strategy to transition away from hardware and into software and cloud-based services has taken longer than investors had hoped. In 2014, the company stepped away from a long-held goal of making $20 in earnings per share by 2015, a target set by CEO Ginni Rometty's predecessor that arguably tied the company's strategy to an unwieldy need to cut costs and aggressively buy back shares instead of building the long-term business.
Shares have recovered some of their losses this year, but IBM has now gone 17 consecutive quarters of declining revenue, a rare long-term contraction for a blue chip stock. In its most recent quarter, revenue fell 3%, though revenue in strategic imperatives increased 12% and 30% in cloud.
Earnings per share fell much faster in the quarter, dropping 23% as gross margin fell by 200 basis points and declined in four of its five business segments, and spending on SG&A and R&D increased. Management continues to insist that its plan is unfolding as expected, eyeing $13.50 in EPS, though the continuing slide in revenue and sharp drop in earnings is not encouraging.
For dividend investors, the company continues to deliver, however, with a yield of 3.5%. Its last dividend hike came in May of this year, with the company raising its payout 7% to $1.40 a quarter.
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Making the arches golden again
Like IBM, McDonald's was struggling just a few years ago, plagued by food safety incidents in Asia and rising competition at home as comparable sales slipped. The stock traded sideways for several years, and earnings per share fell for several quarters in a row from 2013 to 2015.
However, with the arrival of new CEO Steve Easterbrook last year the fast-food chain seems to have found its footing again. The company has introduced programs like all-day breakfast in the U.S., which has been wildly popular and has also brought the company up to speed with changing food tastes -- such as its pledge to eliminate antibiotics from chicken and use only cage-free eggs.
Easterbrook committed to refranchising hundreds of company-owned restaurants, with a long-term goal of having 95% of its restaurants franchised. Selling locations back to franchisees frees up capital to return to shareholders that would otherwise be spent on store maintenance. It's a strategy that's been successfully executed by peers including Burger King and Wendy's. McDonald's also promised to ramp up expansion in Asia, adding 1,000 new stores in China over the next few years.
The stock has pulled back in the last couple months after its second-quarter earnings report came out, setting up a potential buying opportunity. Its dividend remains strong with yield of 3.1%, and it's expected to raise its dividend this fall. While its last increase was just 5%, the company may want to reward investors with a bigger hike after strong profit growth this year.
And the better buy is...
Both stocks offer solid dividends, but McDonald's has emerged from years of doldrums with a plan to grow profits, and it's successfully executing it. IBM, on the other hand, is still in the midst of a turnaround that is eroding profits and has already gone on much longer than originally promised. Its success is not guaranteed.
IBM may be the cheaper stock on a P/E basis here, but McDonald's is the better play. With growing profits, the company is more likely to fund dividend growth, and the stock could easily recover the 10-15% it's shed since the summer.
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Jeremy Bowman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.