Better Buy: PepsiCo vs. McDonald's
With market volatility on the rise in recent weeks, many investors are looking to shift cash toward stable businesses that tend to do well in a wide range of economic environments. These quality blue chips are also prized for their steadily rising divided payments that can help cushion the blow of a potential stock market drop.
Today, we're looking at two businesses that meet these high qualifications and stacking them up against each other to see which might make a better long-term buy. While both PepsiCo (NASDAQ: PEP) and McDonald's (NYSE: MCD) bring unique strengths to the table, there are good reasons an investor might prefer one over the other right now.
PepsiCo vs. McDonald's stocks
Market leaders in tough industries
Both companies are taking full advantage of their leading market positioning to post strong results in difficult selling conditions. At McDonald's, that translates into a nearly 5% increase in comparable-store sales through the first three quarters of 2018, while rivals like Yum! Brands' Taco Bell and KFC have been flat. Pepsi, meanwhile, has raised sales by about 3% in a tough environment for both soft drinks and consumer packaged foods.
Each company is facing challenges, to be sure. Pepsi's growth has been trailing Coca-Cola's in recent quarters so much that the company has been forced to rely more on its snack-food segment to deliver most of its gains. McDonald's is enduring declining customer traffic in its U.S. market that the management team hopes to fix through an aggressive store-upgrade initiative. Still, the restaurant chain holds the edge in terms of the strength of its operating trends.
Getting more profitable
PepsiCo and McDonald's are both financial juggernauts, and they are also becoming more profitable these days. Yet, again, McDonald's comes out ahead in this area. The fast-food giant's operating profit margin soared to 42% of sales in 2017 from 32% a year earlier thanks mainly to its refranchising initiative. By selling down its proportion of company-owned locations to about 5% from 15% a few years ago, the chain is trading volatile food sales for steady, profitable rent, royalties, and fees. There's a bit more improvement to come in this area, too, since McDonald's still plans to sell about 3% of its global base of stores to franchisees.
Pepsi is cutting costs aggressively, and success here has helped push operating margin to an eight-year high. However, its gains in this department don't approach the head-turning results that McDonald's has managed.
Neither company is a slouch when it comes to direct cash returns, with both McDonald's and Pepsi announcing a 15% boost to their annual dividends this year. Pepsi pays a more generous 3.3% yield right now, but two factors suggest McDonald's dividend will grow more quickly in the years to come. First, the restaurant chain has more of a buffer given that the payout amounts to about 60% of earnings, compared with over 90% for Pepsi. And second, McDonald's cash flow is more robust these days, meaning it has plenty of funds that it can direct toward share repurchases and dividends even after pouring resources back into the business.
Overall, McDonald's looks like the stronger investment from both an operating and a financial standpoint. That said, Pepsi's path could shift significantly under its new management. Investors should get their first concrete view of that updated strategy in early 2019 when incoming CEO Ramon Laguarta holds his first earnings conference call.
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Demitrios Kalogeropoulos owns shares of McDonald's. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.