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McDonald's (NYSE:MCD) and Wendy's (NASDAQ:WEN) are two leading fast-food companies, but their share prices have been going in far different directions. While McDonald's has produced steady gains over the past five years, Wendy's stock has crashed more than 60% over that stretch.
But although McDonald's has made for a reliable income investment for years, it's been struggling to generate much in the way of growth of late. While Wendy's may be in an even worse situation, it's a much cheaper and higher-yielding stock. Could it be the better option for investors given its incredibly low value, or is McDonald's with its impressive track record still the best option for long-term investors? Let's find out.
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There are few brands in the world as iconic as McDonald's. Its golden arches are visible from far away and easily recognizable on highways, with the company's fast-food restaurants serving as go-to options for people in all sorts of circumstances.
In the company's most recent earnings report, McDonald's generated comparable sales growth of 1.5% globally. While it's not terribly impressive, it's still steady nonetheless. Perhaps more importantly, however, is that its adjusted operating income rose by 8% during the period.
A slow-growing top line isn't a huge problem, especially with economic conditions not being ideal and many consumers cutting back on spending and discretionary purchases. McDonald's has proven to be a resilient brand, and with the stock now also being a Dividend King, recently raising its payout for a 50th consecutive year, it makes for a solid long-term investment to simply buy and hold. At 2.7%, it also offers a higher yield than the S&P 500 average of 1.1%.
Wendy's is also a top name in fast food, with a presence in dozens of countries. Although it's much smaller than McDonald's, it's a notable player in the industry. The company has been struggling, reporting that same-store sales in the U.S. were down by nearly 6% in its most recent quarter, which ended on Sept. 27.
However, the business has announced the launch of "Dave's Way," a strategy aimed at increasing market share, customer traffic, and overall profitability. The company says that it's already showing "early signs of improving performance," but it is a multi-year strategy.
The appeal of the stock is its potential to turn things around. Wendy's has lost so much of its value over the years that investors are taking notice; the company recently rejected a $1.4 billion bid for its business from Nelson Peltz's company, Trian Fund Management. It's a sign of the deep value that resides within the stock these days. There may be risk here, but there's also some compelling upside if Wendy's is able to turn things around and get back to growth.
Although it cut its dividend this year, it's now at a more manageable level, and it still yields 3.4%, solidly higher than McDonald's. Wendy's is also slightly cheaper than McDonald's stock, trading at a forward price-to-earnings multiple of 15 (based on analyst expectations), versus a multiple of nearly 21 for its larger rival.
For risk-averse investors and those who prioritize dividend income, there's no doubt that McDonald's is the more compelling investment. There's much more safety and stability with the stock. It also has a growing dividend, which is much more valuable than a higher payout, especially one that's recently been cut.
There is, however, also a contrarian case to be made here. Wendy's has nosedived so much that even if it were to double in value, it still wouldn't be at the levels it was at two years ago. The stock has also been reasonably stable of late and has risen by 14% in the past six months. Wendy's remains a top brand in the fast-food industry, and the recent offer to buy the business is perhaps a sign that, at this level, large investors see significant value, suggesting it has bottomed out or is approaching a bottom. That's not a guarantee, as stocks can always go lower. But for investors who do have a high tolerance for risk and volatility, Wendy's may be the more compelling option due to just how much more upside it may possess than McDonald's.
Ultimately, however, the choice between these two stocks can vary greatly depending on the type of investor and their risk tolerance.
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David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool recommends the following options: long January 2028 $320 calls on McDonald's and short January 2028 $340 calls on McDonald's. The Motley Fool has a disclosure policy.
McDonald's vs Wendy's: What's the Better Fast-Food Stock to Buy Right Now? was originally published by The Motley Fool
