McDonald’s Versus Starbucks: Dividend Stock Analysis

McDonald’s (MCD) and Starbucks (SBUX) are the two largest food/beverage restaurant chains in the world.

McDonald’s currently has a market cap of $91.9 billion, while Starbucks has a market cap of $86.1 billion. Both companies are around the same size.

Starbucks was founded in 1971. McDonald’s was founded in 1955. Over the last decade, Starbucks has compounded its earnings-per-share at a tremendous 17.9% a year. McDonald’s has delivered above average earnings-per-share growth of 10.9% a year.

In recent years, Starbucks has continued to grow rapidly, while McDonald’s has stagnated. The table below shows both companies expected earnings-per-share in 2016 and 2015, as well as historical earnings-per-share going back to 2010:

Year Starbucks McDonald’s 2016 (estimates) $1.90 $5.10 2015 (estimates) $1.60 $4.75 2014 $1.36 $4.82 2013 $1.13 $5.55 2012 $0.90 $5.36 2011 $0.76 $5.27 2010 $0.64 $4.60

Note: All earnings numbers and estimates are from Value Line

You can clearly see that Starbucks has generated beautifully consistent earnings-per-share growth since 2010. McDonald’s on the other hand, has not. Earnings-per-share actually peaked for McDonald’s in 2013. The company is not expected to generate higher earnings-per-share until around 2018 – a 5 year period of stagnation.

Valuation & Growth Analysis

Starbucks currently trades for a price-to-earnings ratio of 32.8. McDonald’s has a price-to-earnings ratio of 19.9.

McDonald’s is quite clearly the cheaper of the two companies based on its significantly lower price-to-earnings ratio which is a result of no growth over the last several years.

Starbucks is expected to grow its earnings-per-share at around 15% a year over the next several years. The company will grow through a massive new store opening campaign. Store count is expected to grow at over 7% a year for Starbucks. The company is also expecting comparable store sales growth of approximately 5% a year from a mix of greater food sales and Teavana sales. Margin improvements and share repurchases will account for the remaining 3 percentage points of growth for Starbucks. Adding in Starbuck’s current dividend yield of 1.1% gives investors an expected total return of about 16.0%.