After a powerful rally over the past year, America’s two biggest food stocks—Starbucks (NASDAQ:SBUX) and McDonald’s (NYSE:MCD)—are showing some signs of peaking.
Over the past month, both stocks underperformed the benchmark S&P 500 Index, with Starbucks losing over 9% of its value and McDonald’s shares falling more than 3%.
This spell of weakness comes after a remarkable run in the past five years, when these food chains rewarded their investors with supersized gains. In both cases, investors more than doubled their monies, including dividends.
Their equally impressive gains makes it a bit more complicated for investors to decide which of the two stocks is worth investing for the next five years. Here are some factors worth considering.
McDonald’sTech-Driven Growth
McDonald’s recent earnings performance offers a solid evidence that the company’s technology-driven turnaround is moving ahead at a fast pace.
In the quarter that ended in June, the fast-food chain posted its fastest global sales gain in seven years. Initiatives such as all-day breakfast, which includes the staple McMuffin, and new products like doughnut sticks are helping to bring customers back.
That’s happening at a time when the company is investing heavily in new technology to compete with learner disruptors and attract tech-savvy young customers who are cutting back on their visits to restaurants and using delivery services, such as Uber (NYSE:UBER) Eats.
In its latest tech initiatives, the owner of Golden Arches is testing automated kitchen equipment and voice-activated ordering in its drive-throughs. In March, McDonald’s acquired artificial intelligence startup Dynamic Yield, headquartered in New York and Tel Aviv, for $300 million. That marked the group's largest acquisition in 20 years.
Dynamic Yield’s technology is helping to recognize customers’ needs based on past purchases and other factors. That has boosted sales of items such as drinks and fries at restaurants using the technology, according to CEO Steve Easterbrook.
MCD’s rock-solid dividends offer another reason for long-term investors to hold this stock in their portfolios. After delivering a 8% hike in its payout early this month, McDonald's now pays a quarterly payout of $1.25 per share. That was the company’s 43rd consecutive annual dividend hike.
Starbucks Cools Off After a Big Run
The shares of the coffee-chain that sells popular Frappuccinos and pumpkin-spiced lattes have fallen more than 11% from a record high they hit on July 26. They closed at $88.37 on Friday.
This bearish spell started when Starbucks CFO Pat Grismer warned that the company expects fiscal 2020 earnings per share to be below its “ongoing growth model of 10%.”
Grismer said that one-time tax benefits realized in fiscal 2019 will be a significant headwind to earnings growth next year. He also said the circa $2-billion share buybacks that the company made in fiscal 2019 won’t be there in 2020 to support its stock.
During the past several quarters, Starbucks has been producing earnings growth that exceeded expectations. For the quarter that ended in June, Starbucks logged its fastest global sales growth in three years, helped by strong gains in China and the U.S.
The Seattle-based chain reported a robust 6% gain in same-store sales worldwide—the most since 2016 and well above the 4.2% projection compiled by Consensus Metrix.
On the strategy side, Starbucks remains well on course as the chain wins back coffee-drinkers not only in its home markets, but also in China—a country which has taken center stage in its growth strategy.
During the past year, the number of guests in its loyalty program has grown substantially, reaching 17.2 million active members in the U.S., up 14% year-over-year. The result of these initiatives, coupled with cost-cutting measures in the supply chain, is that Starbucks' growth momentum continues.
Just like McDonald’s, the coffee maker is also a reliable income producer for its investors.
One rarely finds a dividend stock yielding less than 2% that offers such impressive dividend growth. During the past five years, Starbucks delivered about 24% average dividend growth per share and with a payout ratio of about 50%, that pace of cash return doesn't look likely to slow anytime soon.
Bottom Line
We like both McDonald’s and Starbucks for long-term investors. Both stocks have produced extraordinary returns during the past five years and there’s no reason to believe that these giants will lose their shine in the next five years. A better strategy, in our view, would be to take equal exposure in both stocks and hold on to them.