Investors routinely have to compare stocks in completely different industries to come up with which ones are the smarter choice for their portfolios. In the wireless network space, Sprint (NYSE: S) has faced numerous challenges in recent years, but it's hoping to merge with one of its rivals to create a combined company that can stand up to the competitive pressures of the two giants in the industry. Meanwhile, McDonald's (NYSE: MCD) has been a leading force in fast food for decades, and it's worked hard to update its image and keep up with changing times.
It doesn't matter what business a company is in if it can be successful. With that in mind, let's take a closer look at Sprint and McDonald's to see which one looks like the better buy currently.
Valuation and stock performance
Both Sprint and McDonald's have done pretty well recently, but the Golden Arches come out slightly ahead. McDonald's shares are up 20% in the past year, compared with a 14% gain for Sprint since March 2018.
Image source: McDonald's.
In terms of valuation, the two companies are in such different situations that it's hard to compare them fairly. Sprint's earnings have been under pressure for a long time, and on both a trailing and forward basis, earnings multiples have routinely been in the 75 to 100 range. Meanwhile, McDonald's has a more traditional valuation, although a trailing multiple of 25 and a forward multiple of 22 are both relatively elevated historically for the fast-food giant. Neither Sprint nor McDonald's looks like a huge bargain at current levels, but McDonald's greater momentum gives it the nod here.
In terms of dividend income, there's only one choice between these two stocks, and it's an easy one to make. Sprint doesn't pay a dividend, and it's likely to take any available capital it has to reinvest into its business with an eye toward upgrading its network and making other attempts to boost the value of its assets.
Meanwhile, McDonald's is a dividend investor favorite. The stock's yield is currently 2.5%, with the fast-food giant having recently celebrated its 42nd consecutive annual dividend hike. The increase lifted McDonald's quarterly payout by 15% to $1.16 per share, and the growth rate for the company's dividend has been impressive over the long run. In addition to paying dividends, McDonald's has also made stock buybacks, returning even more capital to its shareholders. If that's important to you, then it's no contest: McDonald's is the only stock that passes the test.
Growth prospects and risk
Both Sprint and McDonald's have growth opportunities, but they also face major obstacles to realizing their goals. For the most part, investors seem resigned to the fact that Sprint's future growth prospects are entirely tied to whether its merger with T-Mobile US (NASDAQ: TMUS) goes through, and the combined company could have a lot of chances to be disruptive to larger competitors. Ideas like launching home broadband services could put wireless network providers in even further competition with cable television operators, creating potential new revenue streams to help offset the massive costs of upgrading to 5G coverage. Yet getting the T-Mobile merger done in the first place is proving to be more difficult than many had anticipated, as some regulators are nervous about the loss of competition in going from four major carriers to three -- despite the obvious disadvantages the two smaller companies have facing off against the industry's giants.
For McDonald's, growth plans are clearer. The fast-food giant understands that it needs to keep up with the pace of innovation in serving customers the way they want to be served, and that involves integrating a whole lot of new technology. On top of considering initiatives like delivery, self-ordering kiosks, and mobile advance ordering, McDonald's just spent $300 million to acquire a company that can help personalize the drive-through experience for its customers. With the move, McDonald's will be able to change what menus look like automatically to cater not just to an individual customer but also to the weather conditions and consumer preferences in the area of the restaurant. With its efforts to expand its menu to include all-day breakfast and coffee-style beverages having gone extremely well, McDonald's has the momentum for further transformative moves.
For now, McDonald's has a clear edge over Sprint. With dividends, a more attractive valuation, and clearer growth prospects, McDonald's offers a level of comfort that Sprint just can't right now -- especially given the risks the wireless provider faces.
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