Friday, February 8, 2013

YUM! Brands (YUM) Dividend Stock Analysis

YUM! Brands, Inc. (YUM), together with its subsidiaries, operates quick service restaurants in the United States and internationally. Dividend stock has paid dividends since 2004, and has increased dividends for 8 years in a row.

The company’s last dividend increase was in September 2012 when the Board of Directors approved a 17.50% increase in the quarterly distribution to 33.50 cents /share. The company’s peer group includes McDonald’s (MCD), Burger King (BKW) and Domino’s Pizza (DPZ).

Over the past decade this dividend growth stock has delivered an annualized total return of 21.10% to its shareholders.

The company has managed to deliver a 12.60% average increase in annual EPS since 2002. Analysts expect YUM! Brands to earn $3.27 per share in 2012 and $3.67 per share in 2013. In comparison, the company earned $2.74/share in 2011. Over the next five years, analysts expect EPS to rise by 14.27%/annum.

The company’s long-term earnings will be driven by its international segment, where it expects to open new restaurants. The company owned over 14,500 restaurants internationally and 4,500 in China. In total, Yum! Brands had approximately 37,000 restaurants. Chinese units are expected to generate 5% in annual same-store sales growth. Yum! expects to keep increasing the number of restaurants in the double digits in order to capitalize on the growth in emerging middle class there. Rising incomes are making Yum!’s brands even more affordable for an increasing number of people. In fact, the consuming class is expected to double over the next 10 years, going from 300 million to at least 600 million people, as significant urbanization continues.
With this tailwind, Yum! Brand’s new-unit development pace should continue at a high rate, and same store sales should continue to grow. India could be another major source of growth as well. The company believes that its new unit progress with KFC in India is very similar to what they saw in China during its first 10 years. Currently, Yum! owns approximately 450 units in India, and plans to add 150 units in 2013. Overall, the company expects to increase international units by 3%-4%/year, with same store sales exceeding 2%.

Although the US units have not been as hot as the international segment, they have a lot of room for growth also. The company is just getting started with introducing breakfast menu items, and also increasing hours of operations. The number of units has declined from 18,500 in 2007 to 18,000 by 2011.

While the recent reports have not been overly optimistic, I believe that the best acquisitions are made when there is blood on the streets. The third quarter report showed sharply lower sales in the company's China stores for last 2 weeks of 2012 due to the poultry supply situation. This is not an issue that affects just Yum! however, although the media has found it easier to focus on a single target. The company now expects slight decrease in EPS in 2013, although long-term prospects are still bullish. The company is in the process of performing a comprehensive view of Chinese operations, in order to strengthen supply chain, ensure better quality assurance and implement the Shanghai FDA report recommendations. Restoring consumer confidence would probably take time, and there might be a few more earnings dissapointments over the next few quarters, before the tide turns back up

The company generates a very high return on equity, which never fell below 50%. I generally want to see at least a stable return on equity over time.

Ever since Yum! Brands started paying dividends in 2004, it has managed to increase them at a fast clip. The quarterly dividend has increased from 5 cents/share in 2004 to 33.50 cents/share by 2012. Over the past five years, dividends have growth by 17.80%/annum, which is faster than earnings growth.

The dividend payout ratio increased from 0% in 2002 to 40% in 2012. This is a direct result of Yum!’s initiation of a dividend policy, and raising distributions at a faster rate than earnings. Future dividend growth would likely be closer to the growth rate in earnings per share. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently YUM! Brands is trading at 18.30 times earnings, yields 2.20% and has a sustainable distribution. The stock is a little richly valued for my taste, and I would probably try to buy some on dips below $54/share. Of course, if the stock price is flat in 2013, but dividends increase to 40 cents/share, my entry price would increase to $64 /share. It is important to remain disciplined, and only invest in the best companies at the best prices. The issues with Chinese poultry supply would most probably present investors with an attractive opportunity to acquire a great long-term holding at depressed valuations.

Full Disclosure: Long YUM and MCD

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