Who Wins the Fast-Food Stock Fight?

Weigh up this comparison before placing an order for America’s iconic restaurant or its Canadian counterpart, writes John Heinzl, reporter and columnist for Globe Investor.

You can debate all you want about who has the better coffee or breakfast sandwich—McDonald’s (MCD) or Tim Hortons (THI). But today we’re tackling a more pressing question: Which fast-food chain has the more appetizing stock?

Certainly, Tims and Mickey D’s have plenty of things in common. Both companies pay dividends. Both have a track record of raising their dividends. And, unless consumers develop a sudden preference for tofu and Brussels sprouts, both will be hiking their dividends for years to come.

What’s more, because they sell inexpensive food, both companies should hold up relatively well even if the economy goes into the deep fryer.

But there are also some key differences that investors need to consider before they fork over their cash. Let’s see how the two stocks stack up on a range of measures.

Dividend History
Since declaring its first dividend in 1976, McDonald’s has increased its payment for 35 consecutive years. Just as customers know what to expect when they order a Big Mac, investors know they’ll get a dividend increase from McDonald’s every September.

Tim Hortons has only been paying dividends since 2006, when it went public, although it, too, raises its dividend annually. Advantage: McDonald’s

Dividend Growth
McDonald’s dividend has increased at a compound annual rate of 15% over the past five years. That’s good, but not as good as Tim Hortons, which has raised its dividend by about 22% annually over the same period.

Tim Hortons may also have more capacity for future dividend growth, given that its payout ratio was a conservative 29% of earnings in 2011, compared with 48% for McDonald’s. Advantage: Tim Hortons

Dividend Yield
No contest here. McDonald’s yields 3.1%, which is more than double Tim Hortons’ yield of 1.5%. So although Tims is growing its divvy at a faster rate, if you’re looking for current income, the Golden Arches is your best bet. Advantage: McDonald’s

Currency
For Canadian investors, owning a US stock introduces volatility in the form of currency fluctuations (and vice versa for Americans investing in Canada).

Exchange rates can work for you, or against you, but if you stick to stocks in your own country (or hedge your foreign positions), you won’t have the extra volatility to worry about. [Tim Hortons does have a slight edge, though, in that it trades in both Toronto and New York—Editor.] Advantage: Tim Hortons

Earnings Growth
Based on analyst estimates compiled by Globeinvestor.com, McDonald’s earnings per share are expected to grow at a compound annual rate of about 9.1% over the next two years. As impressive as that is, Tims’ earnings are expected to grow at an even faster 13.4%. Advantage: Tim Hortons.

Brand Strength
Tim Hortons is a powerhouse in Canada, where the coffee and doughnut chain is part of the cultural fabric. But outside those borders, it doesn’t have nearly the same resonance, as evidenced by its cautious US expansion.

McDonald’s, on the other hand, is a formidable global brand operating in 119 countries. In fact, it now generates more revenue from Europe than from North America, and income from Asia-Pacific, Middle East, and Africa has doubled over the past six years. Advantage: McDonald’s

Valuation
McDonald’s was the top-performing stock on the Dow in 2011. But the shares are down more than 10% from their 52-week high, hurt by April same-store sales growth that was slightly weaker than expected.

Mickey D’s now trades at a reasonable multiple of about 16 times estimated 2012 earnings and 14.5 times 2013 estimates.

Tim Hortons shares are up more than 11% this year, and trade at a significantly higher multiple of 20 times 2012 estimated earnings and 18 times 2013 estimates. The rich P/E makes the shares vulnerable to a sell-off if results disappoint. Advantage: McDonald’s

The Verdict
McDonald’s and Tim Hortons are both excellent fast-food operators that will likely reward shareholders with solid long-term total returns, both from capital gains and growing dividends.

However, McDonald’s juicier current yield, more attractive valuation, and proven global expansion record give it the edge in Yield Hog’s books.

Disclosure: I eat far too frequently at both chains, own McDonald’s shares, and would consider purchasing Tim Hortons if it dropped below $50.