Key Points
Coca-Cola expects steady revenue growth.
McDonald's sales have struggled.
Total-return investors will find one of these two intriguing.
Coca-Cola (NYSE: KO) was founded in the late 1800s, while McDonald's (NYSE: MCD) traces its roots back to 1940. They have become two of the most well-known and popular consumer goods companies.
Past success doesn't provide any guarantees about the future, of course. Businesses need to evolve to remain relevant. With that, which company -- Coca-Cola or McDonald's -- has positioned itself better for the future and makes a better investment?
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Coca-Cola
Many people know about Coca-Cola's sodas, including its namesake brand and Sprite and Fanta. Among other drinks, it also sells water, sports drinks, juice, and plant-based beverages, which is important given consumers' changing tastes.
You can find Coca-Cola just about anywhere across the globe -- whether in grocery stores, restaurants, or stadiums. That makes it tough for other brands to compete given the powerful name recognition and distribution.
First-quarter revenue under generally accepted accounting principles dropped 2%, but that was largely due to foreign currency exchange. After stripping that out along with the impact of acquisitions and divestitures, revenue grew 6%. Adjusted operating income increased 10%.
The revenue increase was largely due to changes in prices and product mix, which added five percentage points. However, it didn't just rely on price increases. Higher volume contributed
one percentage point.
Most of Coca-Cola's beverages are produced in the markets in which they are sold. Hence, while it anticipates tariffs will raise costs, management said the impact will be "manageable." It's calling for a 5% to 6% increase in revenue this year.
McDonald's
Most people recognize McDonald's golden arches. But the vast majority of its restaurants -- 95% -- are franchised, not company owned. These produce about 60% of its annual revenue.
The company typically collects a royalty fee based on a percentage of a restaurant's sales along with rent under a franchise agreement. Since franchisees make capital investments, this is less capital-intensive and more cost-effective for McDonald's.
It does benefit from increased restaurant sales. But its locations have struggled to grow the top line amid a consumer base challenged by overall high prices, the chain's own price increases, and dietary changes.
McDonald's first-quarter same-store sales (comps) dropped 1%. At U.S. locations, which account for about 40% of sales, comps fell 3.6%. That was primarily caused by lower traffic, which means customers are turning away from the restaurants. Adjusted operating income fell 1%.
The choice
Neither Coca-Cola nor McDonald's has much appeal for investors looking for fast growth. Those days seem long gone. However, in the context of growth and income, which one offers better total return potential?
McDonald's core customer may feel some pressure from the overall economy, but I find missteps like price increases more troubling. Alienated customers who could rely on it for value pricing may not return so quickly.
Nonetheless, the market seems to feel optimistic about the company. The stock has gained 16.9% over the last year through July 7 compared to 11.9% for the S&P 500. However, that feels premature given McDonald's current sales challenge. I would hold off until you see evidence of increasing guest counts.
Turning to Coca-Cola, is the company worthy of your investment dollars? It has been executing pretty well despite economic challenges. Over the last year, the stock gained 11.4%, or 15.2% when including dividends. The S&P 500 returned 14.3% during this period.
The stock has become somewhat more expensive over the last year. The shares have a price-to-earnings ratio (P/E) of 28 compared to about 26 in the prior 12 months. However, that's less expensive than large-cap stocks as measured by the S&P 500, which has a P/E of 30.
With a relatively reasonable valuation, improving results, and a 2.9% dividend yield, Coca-Cola is the clear winner to me.
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Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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