Starbucks Vs. McDonald’s: What's The Better Choice For Income Investors?
Investing.com | Jun 27, 2018 04:20
Starbucks' (NASDAQ:SBUX) five-year winning streak versus McDonald's (NYSE:MCD) just came to an end. The multinational coffee behemoth is seeing the brakes grind to a halt in the current quarter for its unprecedented domestic growth. Starbucks' same-store sales, which are expected to rise globally by an anemic 1% for the current quarter, signal that the company is now struggling to win back customers who've grown tired of its Frappuccino-based beverages.
Conversely, McDonald's, the global fast food giant, is in the middle of a turnaround. Its shares have gained about 7% this year, while Starbucks' stock has dropped 14% over the same period. After underperforming Starbucks during most of the past half decade, McDonald's is resurgent.
That makes it a bit more complicated to decide which of the US's largest restaurant stocks is worth an investment, but not impossible. Here are the metrics worth noting.
Starbucks: Caffeine-Fueled Growth Ending/h3
This past week was not a good one for shareholders of the world’s largest coffee chain.
Starbucks' shares plunged to a three-year low after the company's announcement that same-store sales for the quarter would disappoint, coming in below Wall Street’s forecast of 3%.
Perhaps the biggest disappointment, however, was the company’s flat performance forecast for China, which was expected to be Starbucks' next growth engine after sales in the saturated domestic market stalled. With about 14,000 stores in the US, it seems Starbucks is fast running out of options for ways to keep domestic customers excited.
Indeed, poor foot traffic is forcing the company to close 150 company-operated stores in densely penetrated US markets during the next fiscal year, three times the number it annually shuts down historically. The company announced these closures last week after the company's product initiative over the last two years failed to connect with consumers, who are looking for less sugary, healthier beverage choices.
Despite these disappointments, long-time, former CEO and outgoing Chairman Howard Schultz believes shares of Starbucks are “cheap and undervalued.” He says the coffee purveyor has a solid plan to recover from this downturn, something that's common in the life cycle of food restaurants.
Get The App
Starbucks has a number of initiatives in the works to turn around their weak sales, including offering a more diverse range of cold beverages, revamping its rewards program and increasing its marketing digitally via the company's mobile app. The company expects these new digital efforts to contribute 1-2% to same-store sales in the Americas in 2019. Globally, China remains the center of Starbucks’ growth plan. It sees revenue there tripling over the next five years.
h3 McDonald’s: Recovery Is Taking Hold/h3
As restaurant chains struggle to get diners into their stores amid changing consumer preferences, McDonald’s appears to be doing something right. Their recovery is taking a firm hold.
The first quarter of 2018 was the 11th consecutive quarter of solid global comparable sales growth for McDonald's. Global same-store sales during the quarter surged 5.5%, exceeding analyst estimates of 3.7%, as the number of customers coming through the doors rose 0.8%.
This rebound is a clear indication that CEO Steve Easterbrook's turnaround efforts over the past three years are paying off. So is now the time to get excited about the future of MCD's Golden Arches?
As part of Easterbrook's strategy, McDonald’s has been recovering market share through a variety of initiatives including all day breakfast offerings, menu innovation such as healthier food choices, as well as higher quality ingredients and improvements to the overall restaurant experience. That propelled its shares to an all-time high of nearly $179 in late January; it closed yesterday at almost $161.
The major push within the company’s growth strategy, however, was to shift away from restaurant ownership and grow franchising. The transformation is in progress: 80% of McDonald's restaurants are already owned and operated by franchisees, but the company wants to increase that number to over 90% by the end of 2018 and ultimately to 95% as part of its cost-cutting efforts.
Bottom Line
The above analysis clearly shows that McDonald’s is a less risky bet for income investors at a time when the burger chain is pursuing a successful turnaround plan while also generating strong earnings momentum.
Trading at almost $161 at the time of writing, MCD shares have 13% upside potential according to analyst consensus forecasts for the next 12 months. We believe the timing is right for income investors to add McDonald’s shares to their portfolios in order to see both price growth and earn a steadily growing dividend. The company pays quarterly dividends of $1.01 per share. At its current price, that translates to an annual dividend yield of 2.52%.
Though Starbucks also pays a quarterly dividend, albeit of 36-cents per share, for an annual yield of 2.84%, we think this is a 'show-me' moment for the company, rather than a time to buy in.
There's no doubt the company is taking action to arrest its slowdown, but we don’t see any sign of a meaningful recovery just yet. And it’s not clear how long it will actually take for Starbucks to translate its strategy into improved earnings. That's especially significant when its biggest bet—China—isn't showing the kind of growth prospects investors, and Starbucks' management, were expecting.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.