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A hot debate has been going around about which fast food company is better to own, McDonald's (NYSE:MCD) or Yum! Brands (NYSE:YUM). The battle essentially boils down to growth versus stability. McDonald's is viewed as the undisputed king of fast food. It has a strong dividend and is widely available all around the globe. Yum! isn't the same concrete, cash cow that McDonald's is. Yum! was a spin-off from PepsiCo (NYSE:PEP), and includes restaurants such as KFC, Taco Bell and Pizza Hut. Yum! has growth on its side, while still paying a dividend and having stability. So that begs the question, which is better?

In this article, I will attempt to draw on key comparisons -- from valuation, to the dividend, and to growth -- to see which one belongs in investor's portfolios. Again, each has its own strong points, so it depends on what that investor is seeking. In any event, hopefully this article can at least offer some perspective for investors who are considering adding either company to their portfolio.

To start things off simply, I have four charts. The first two are the 1-year charts for McDonald's and Yum!, followed by the 3-year charts. For simplicity, I was always put McDonald's first. Below, the charts:

McDonald's 1-Year Chart :

(click to enlarge)

Source: Stockcharts.com

Yum! 1-Year Chart :

(click to enlarge)

Source: Stockcharts.com

McDonald's 3-Year Chart :

(click to enlarge)

Source: Stockcharts.com

Yum! 3-Year Chart :

(click to enlarge)

Source: Stockcharts.com

Neither company has the strongest chart. The 1-year chart for McDonald's has been an interesting ride, but it has held up better than that of Yum!'s. Yum! appears to have more downside potential, whereas McDonald's looks to have recovered and at least has some protection to the downside in the event of a market sell-off.

The long-term chart doesn't look promising for either company, mainly because of the price action in the last year. Though the upward trend is very strong for about 2-1/2 years, it is beginning to break down. Overall though, I think both will recover nicely, even if it's not in 2013.

Now we can start to look at growth. Below, I will show the revenue growth for each company. I will review six fiscal years in total: the previous three years (2009-11), the current fiscal year (2012) and the next two future year estimates (2013-2014). The table will show both McDonald's and Yum!. Below is the table for revenues:

Revenues (In Millions):

Year

MCD Rev $

Change (%)

Yum! Rev $

Change (%)

2009

22,744

N/A

10,836

N/A

2010

24,074

5.8%

11,343

4.7%

2011

27,006

12.2%

12,626

11.3%

2012

27,500*

1.8%*

13,600*

7.7%*

2013

28,900*

5.1%*

14,500*

6.6%*

2014

30,700*

6.2%*

16,200*

11.7%*

(*) = Indicates that these figures are based on future estimates.

Typically I prefer to layout the revenues so that I can see the actual change from year-to-year, as well as the percentage change. But in a head-to-head comparison, I felt that it would be easiest if we put both McDonald's and Yum! on the same table and only used the percentage growth. After all, growth -- and the consistency of that growth -- are the most important things we're looking for when comparing two or more companies.

As you can see in the chart above, Yum! has a more impressive revenue growth than that of McDonald's. Although the figures are close some years (2010, 2011, and estimates for 2013), overall, Yum! has better revenue growth. Again, these two companies are different in terms of how they could be classified. Yum! is a growth company, whereas McDonald's is a blue-chip, mature company. This is something you should consider when looking to add one -- or both -- to your portfolio.

Next, we'll look at earnings per share (EPS) growth. Much like we did with revenues, we'll use the same six fiscal years. Also like before, McDonald's will be on the left, with Yum! on the right. The table will include the actual earnings per share, along with the percentage change from the previous year. Below, the EPS growth:

Earnings Per Share:

Year

MCD EPS

Change (%)

Yum! EPS

Change (%)

2009

4.04

N/A

2.45

N/A

2010

4.58

13.4%

2.75

12.25%

2011

5.23

14.2%

3.13

13.8%

2012

5.31*

1.5%*

3.25*

3.8%*

2013

5.77*

8.6%*

3.62*

11.4%*

2014

6.38*

10.6%*

4.17*

15.2%*

(*) = Indicates that these figures are based on future estimates.

The EPS growth tells a similar story between both of these companies. Yum! has been able to grow earnings per share in the double digit range every year (including estimates), except 2012. McDonald's has done the same -- including the dismal 2012 EPS growth -- with the exception of 2013's estimate, where the growth is expected to be 8.6%. Again, in the growth department, Yum! takes home the hardware. But remember, the two companies are different breeds, and it doesn't necessarily mean one is better than the other.

Before getting into valuation, I want to look at the cash flow statement. The cash flow statement is important because it shows how much a company actually makes. With these figures, it is easy to find the efficiency of each company. Investors will argue that Cash From Operating Activities is more important than Net Income, and vice versa. For simplicity and convenience, I will include both, starting with net income over the previous four years (2008-2011). Below, the cash flow analysis:

Net Income (In Millions):

Year

MCD ($)

Change (%)

YUM ($)

Change (%)

2008

4,313

N/A

972

N/A

2009

4,551

5.5%

1,083

11.4%

2010

4,946

8.7%

1,178

8.7%

2011

5,503

11.3%

1,335

13.3%

Cash From Operating Activities (In Millions):

Year

MCD ($)

Change (%)

YUM ($)

Change (%)

2008

5,917

N/A

1,538

N/A

2009

5,751

(2.8)%

1,421

(7.6)%

2010

6,341

10.25%

1,968

38.5%

2011

7,150

12.75%

2,170

10.25%

As you can see above, McDonald's seems to be the more consistent company, while Yum! is the more volatile company. This isn't necessarily a bad thing. Think of it from a Microsoft versus Apple standpoint. Apple is much more volatile, but has more growth. Microsoft is more consistent, thus less volatility, but doesn't present the growth than Apple does.

When analyzing the net income, the two companies appear very similar. In 2010, both companies grew net income by 8.7. Then in 2011, both grew by double digits, 11.3% for McDonald's and 13.3% for Yum!, respectively.

Looking at the Cash From Operating Activities, both companies lost traction in 2009, with McDonald's figure shrinking by 2.8% from the year before, while Yum! declined by 7.6% from the previous year. Aside from that, the huge figure that stands out is the 38% growth Yum! posted in 2010. In 2011, the companies balanced out to a more normal figure, with McDonald's growing 12.75% and Yum! growing 10.25%, respectively.

So how much do these companies cost? Of course, I don't just mean with respect to dollar cost, but how much are these companies from a valuation standpoint? In the following paragraphs, I will analyze the P/E ratio for future estimates -- as well as the trailing twelve month (ttm) P/E ratio -- while also looking at the PEG ratio, which takes into consideration the valuation, relative to growth. Below, we'll start with the P/E ratios.

Year

McDonald's

Yum!

(TTM) P/E Ratio

17.25

19.25

2012 P/E Ratio

17.3

20

2013 P/E Ratio

16

18

2014 P/E Ratio

14.4

15.6

Note: The 2012, 2013 and 2014 P/E ratios are based off on fiscal years 2012, 2013, and 2014, not the calendar years.

As you can see on the table above, McDonald's is cheaper based on valuation, in any time frame present. But, again you must remember, Yum! has more growth, thus giving it a higher P/E ratio. While McDonald's may be cheaper than Yum! from a valuation point of view, it doesn't mean that Yum! is necessarily expensive. It still sports relatively low P/E ratios, considering the future growth that it represents.

That's why we're also going to look at the PEG ratio, which measures the valuation relative to the growth. We already know McDonald's is cheaper, but perhaps not when you consider growth in the equation. The PEG ratio is derived by dividing the P/E ratio by the annual EPS growth, which we calculated earlier. A measurement of 1 would suggest that the stock price is trading at fair value when considering its future growth. A measurement under 1 would suggest an undervalued stock, while a reading over 1 would suggest an overvalued stock. Below is the PEG ratio for 2013, 2014 and 2017:

Time Frame

McDonald's

Yum!

1-Year PEG Ratio

1.86

1.58

2-Year PEG Ratio

1.35

1.02

5-Year PEG Ratio

2.01

1.50

Note: The 5-year PEG ratio was taken from Yahoo Finance.

Although McDonald's appears cheaper from a valuation standpoint, it's not when you consider the future growth. While both stocks trade at a relatively overvalued state, Yum! is cheaper, especially when looking at the 2-year time frame, where it has a PEG measurement of 1.02, suggesting the stock price is fairly valued.

For the last part of the comparison, I want to look at the dividend. This will show where Yum! is still in the growth phase and McDonald's is in its mature state. Although Yum! is still in "growth mode," it still pays a nice dividend. Currently, McDonald's pays out a quarterly dividend of $.77, which makes the current yield 3.4%. Yum! pays a quarterly dividend of $.335, which makes the current yield 2.05%.

Below are several things to take in from the dividend analysis. I will display the previous 10 years of dividend payments -- nine years for Yum! since it did not pay a dividend in 2003 -- in both chart and table form. The dividend will be measured on an annual basis, and will reflect the change from a dollar basis perspective as well as as a percentage basis perspective when looking at the table. Below, the dividend analysis will begin with McDonald's:

McDonald's Dividend Analysis:

Year

Current Annual Dividend Payout ($)

Previous Annual Div. Payout After Raise ($)

Percentage Change From Previous Year

2003

.40

.235 (from '02)

+ 70.21%

2004

.55

.40

+ 37.5%

2005

.67

.55

+ 21.8%

2006

1.00

.67

+ 49.25%

2007

1.50

1.00

+ 50%

2008

1.64

1.50

+ 9.33%

2009

2.05

1.64

+ 25%

2010

2.26

2.05

+ 10.24%

2011

2.53

2.26

+ 11.94%

2012

2.87

2.53

+ 13.43%

Yum! Dividend Analysis:

Year

Current Annual Dividend Payout ($)

Previous Annual Div. Payout After Raise ($)

Percentage Change From Previous Year

2004

.10

+.10

N/A

2005

.215

+.115

115%

2006

.265

+.05

23.25%

2007

.525

+.26

98%

2008

.68

+.155

29.5%

2009

.78

+.10

14.7%

2010

.88

+.10

12.8%

2011

1.035

+.155

17.6%

2012

1.19

+.155

15%

This is a lot to take in, and is impressive by both parties. Since McDonald's has a bigger payout and a higher yield, it obviously gets the nod over Yum! However, Yum! has been able to grow its dividend at an extremely impressive rate. Although the explosive dividend growth was strong when it first began, it has slowed to a more obtainable, consistent level, hovering in the teen figures for the previous four years. Still, McDonald's has maintained double digit dividend growth in every year but one (2008), and the higher yield makes it more appealing, especially for income-oriented investors.

Final Thoughts

There was a lot to take in with this article in terms of comparing McDonald's and Yum! Brands. Both of these companies have unique traits -- some good, some bad, depending on the investor. No one says that you can't own both -- there's no crime in that. Although similar, both are very different.

McDonald's is the dinosaur here. It has been around for a very long time. It's a mega cap company, and it is an absolute cash cow. It operates in 119 countries and serves 68 million customers, per day. So naturally, there's no harm in buying a company that will more than likely be around in 50 or 100 years. McDonald's is the king of fast food with a restaurant in almost every city and town, and seemingly every exit along the highway.

Yum! Brands is different. Sure there's a lot of Taco Bell's and KFCs around, but not to the extent of McDonald's. Which is a clear and simple reason why McDonald's has lower growth and rolls in the dough -- thus, the higher dividend as well. But Yum! offers a unique position of further future growth, with stability and a yield of about 2%.

Each brings different qualities to the table, and I like both of these names. However, both companies will likely face strong future headwinds in 2013 from rising commodity and healthcare costs. Still, I like the names based on a long-term time horizon. I think commodity costs could weigh heavily on the restaurant sector in 2013 and possibly longer, but would prefer this to be the issue rather than weak demand.

To be honest, I hope the article is right, and names like McDonald's and Yum! get pounded. That way, I can continue to add shares of McDonald's and possibly open a position in Yum! that will be very beneficial over the long haul. Hopefully, my head-to-head comparison was able to shed some light on the benefits and downfalls of owning one -- or both -- of these companies for investors looking to add or create a position. I remain long-term bullish on the broader restaurant sector.

For a deeper analysis of McDonald's, please read my article here.

Source: McDonald's Or Yum: Which Belongs In Your Wallet?