Yum! Brands vs. McDonald’s: Which Stock Is the Better Buy?

November 12, 2024 at 07:15 AM EST

Yum! Brands vs McDonald's

Although we don’t recommend trying to time the market, timing frequently matters when it comes to buying stocks. And right now, it appears that Yum! Brands Inc. (NYSE: YUM) may be a better stock to buy than McDonald’s Corp. (NYSE: MCD). While McDonald’s is a brand unto itself, Yum! Brands is the parent company of KFC, Taco Bell, Pizza Hut, and Habit Burger Grill restaurant chains.

Both companies operate in the retail stocks sector. One advantage for investors looking to compare the stocks is that both companies report earnings around the same time. Restaurant stocks have been under pressure in 2024. Consumers continue to cut back on discretionary spending. Plus, although it’s too early to quantify at this time, the growing popularity of GLP-1 drugs may be having more than just an anecdotal effect on revenue for fast-food companies.

However, the strong performance of consumer discretionary stocks as part of the strong post-election rally may make this a good time to consider starting or adding to your position in one of these stocks.

You Might Be Surprised to Know...

The total return for YUM stock over any length of time compares favorably to that of MCD stock. Here are two numbers to consider:

Total Return for the Last Five Years:

MCD – 73.44%

YUM – 52.19%

Total Return for the Last 10 Years:

MCD – 306.5%

YUM – 218.86%

The issue is that much of Yum! Brands' growth has been fueled by the company’s dividend. The stock price growth over the last five years has been 38%, less than half of the 86% growth for MCD stock in that same time.

Embracing Today’s Digital Reality

However, it may be time for YUM to make up for lost time. That's because of the company’s digital strategy. For many consumers, dining out is just another phrase for “carry out.” The ability to have food delivered anytime and anywhere has changed expectations for fast food chains, particularly as they compete with healthier alternatives from companies like Sweetgreen Inc. (NYSE: SG).

One way that fast-food restaurants are managing the intersection of food and technology is through the adoption of digital and artificial intelligence (AI) tools. This includes point-of-sale technology such as kiosks, mobile apps, and AI voice technology to make drive-thru ordering more efficient and inventory management.

McDonald’s and Domino’s Pizza Inc. (NYSE: DPZ) were early adopters, and that’s one reason those stocks were among the top performers despite the numerous challenges the restaurant industry faced in the last five years.

But Yum! Brands is catching up. In 2023, the company recorded $30 billion in digital sales. That was a 22% year-over-year increase and made up 45% of the company’s sales mix. The company isn’t disclosing the amount of its AI investment, but considering the competition in this sector, the investment is likely to be sizable.

Why YUM Stock May Be a Tasty Choice

These companies are remarkably similar in most metrics that investors commonly use. For example, both stocks have forward price-to-earnings (P/E) ratios that are in the mid-20x range. That's well below the sector average for restaurant stocks which is around 31x earnings.

McDonald’s does offer a richer dividend, but you’re also paying about double per share for MCD stock. Also, McDonald’s has a history of using more of its free cash flow to pay dividends. You shouldn’t take that to mean that the dividend isn’t safe, but McDonald’s may not have as much room for growth in the short term.

To be perfectly clear, McDonald’s is a great buy-and-hold stock. But I question its short-term growth potential.

That’s why if you’re a growth-oriented investor looking for a better buy in 2025, YUM may be the choice, particularly if you're looking for a short-term trade. The company’s brands have been dropping in popularity. However, some of this was due to efficiency issues that the company is well on its way to addressing.

Also, the KFC and Pizza Hut brands are gaining strong traction in emerging markets, particularly in Latin America, Africa, and India. Now, U.S. sales have to recover. It remains unclear how soon that turnaround will happen, but the current quarter has historically been the strongest for the company.