Investors considering starting a position in Yum Brands may be a lot smarter than you think. Everyone knows about the problems KFC is having with their suppliers in China and those concerns have affected the price of Yum stock. It's also affected a lot of other companies too.
Everyone also knows that it's only a matter of time before the American companies fix the problems in China and bring their food supply chain up to American standards. The only question is how long will it take and haw much damage will be done to the stock prices of these companies. This type of situation is ideal for a dividend growth investor. Yum is a company with a great history of increasing revenues, earnings and dividends and yet they are being depressed by an event that will soon be repaired. The result is that the company is on sale for anyone with a longer term horizon.
Everyone also knows that it's only a matter of time before the American companies fix the problems in China and bring their food supply chain up to American standards. The only question is how long will it take and haw much damage will be done to the stock prices of these companies. This type of situation is ideal for a dividend growth investor. Yum is a company with a great history of increasing revenues, earnings and dividends and yet they are being depressed by an event that will soon be repaired. The result is that the company is on sale for anyone with a longer term horizon.
The Company
 YUM! Brands, Inc. (YUM), together with its subsidiaries, operates quick service restaurants in the United States and internationally. It operates in six segments: YUM Restaurants China, YUM Restaurants International, Taco Bell U.S., KFC U.S., Pizza Hut U.S., and YUM Restaurants India. The company develops, operates, franchises, and licenses a system of restaurants, which prepare, package, and sell various food items, as well as operates casual dining concept restaurants. As of August 11, 2014, it operated approximately 40,000 restaurants in 125 countries and territories primarily under the KFC, Pizza Hut, and Taco Bell brands, which specialize in chicken, pizza, and Mexican-style food categories. The company was formerly known as TRICON Global Restaurants, Inc. and changed its name to YUM! Brands, Inc. in May 2002. YUM! Brands, Inc. was founded in 1997 and is based in Louisville, Kentucky. (Daily Chart) (Weekly Chart) | 14 September 2014 Price $71.58 1yr Target $80.55 No. of Analysts 17 1yr Cap Gain 12.53% Dividend $1.48 Yield 2.06% 1yr Tot Return 14.59% EPS (ttm) $2.64 Div Payout Ratio 56.06% EPS next year $3.94 P/E Ratio 27.11 PEG 1.81 Forward P/E Ratio 18.15 ROA 13.80% ROE 54.20% |
Yum Brands is constantly looking for new ideas in the restaurant industry and two of their most recent ideas revolve around a Vietnamese fast food concept and a new way of cooking and serving chicken to compete with Chick-Fil-A.
Yum has opened two new restaurants in Dallas, TX, called the Banh Shop. The restaurants are subtitled "Saigon Street Food." This fast food concept appears to be a direct attack on Chipotle's Southwest Asian offshoot concept - The ShopHouse. While Yum has opened two of the Banh Shop restaurants, Chipotle has opened 8 of theirs. At this point it really hasn't been determined if Asian cuisine will work in the fast food industry, which is dominated by pizza, tacos, chicken and hamburgers.
Another concept that Yum is exploring is a chicken sandwich shop in which chicken is served similarly to the way hamburgers are served at 5 Guys restaurants or In-N-Out Burger. The concept is directly aimed at Chick-Fil-A. The sandwich shop is located in Arlington, TX, and is simply called Super Chix. Customers start with the basic chicken burger and then add various toppings. It's generally served with fries and a drink. This concept could become very successful at one thing KFC has had so much trouble doing - selling a chicken sandwich.
Yum has opened two new restaurants in Dallas, TX, called the Banh Shop. The restaurants are subtitled "Saigon Street Food." This fast food concept appears to be a direct attack on Chipotle's Southwest Asian offshoot concept - The ShopHouse. While Yum has opened two of the Banh Shop restaurants, Chipotle has opened 8 of theirs. At this point it really hasn't been determined if Asian cuisine will work in the fast food industry, which is dominated by pizza, tacos, chicken and hamburgers.
Another concept that Yum is exploring is a chicken sandwich shop in which chicken is served similarly to the way hamburgers are served at 5 Guys restaurants or In-N-Out Burger. The concept is directly aimed at Chick-Fil-A. The sandwich shop is located in Arlington, TX, and is simply called Super Chix. Customers start with the basic chicken burger and then add various toppings. It's generally served with fries and a drink. This concept could become very successful at one thing KFC has had so much trouble doing - selling a chicken sandwich.
| --- Wednesday, September 10, 2014 --- YUM! Brands (YUM) declares $0.41/share quarterly dividend, 10.81% increase from prior dividend of $0.37. Forward yield 2.25% Payable Nov. 7; for shareholders of record Oct. 17; ex-div Oct. 15. |
 KFC is a fast food restaurant chain that specializes in fried chicken. It's the world's second largest restaurant chain (as measured by sales) after McDonald's, with 18,875 outlets in 118 countries and territories as of December 2013. KFC popularized chicken in the fast food industry, diversifying the market by challenging the established dominance of the hamburger. KFC was one of the first fast food chains to expand internationally, opening outlets in the United Kingdom, Mexico, and Jamaica by the mid-1960s. In 1987 KFC became the first Western restaurant chain to open in China. China is now the company's single largest market. |  Pizza Hut is an American restaurant chain with international franchises, known for pizza and side dishes. In 2012, the company had more than 6,000 Pizza Hut restaurants in the United States, and had more than 5,139 store locations in 94 other countries and territories. Pizza Hut is split into several different restaurant formats; the original family-style dine-in locations; store front delivery and carry-out locations; and hybrid locations that offer carry-out, delivery, and dine-in options. Many full-size Pizza Hut locations offer lunch buffet, with "all-you-can-eat" pizza, salad, bread sticks, and a special pasta. |  Taco Bell is an American chain of fast-food restaurants that serve a variety of Tex-Mex foods including tacos, burritos, quesadillas, nachos, other specialty items, and a variety of "value menu" items. Taco Bell serves more than 2 billion customers each year in more than 6,500 restaurants mostly in the U.S., more than 80 percent of which are owned and operated by independent franchisees. Taco Bell created U.S. Taco Co. in 2014. The menu will consist of tacos with American fillings, and will not sell food sold in Taco Bell restaurants such as burritos. It was launched in Huntington Beach, California in August 2014 |
The Fundamentals
Revenues have been increasing at a pretty steady rate for the last ten years and estimates have revenues continuing to increase into the next two years. The only down years were 2009 which can be attributed to the recession that hit YUM's customers pretty hard, and 2013 which is associated with the supply problems in China. Earnings, on the other hand, were less affected in 2009 but did decrease in 2013 for reasons similar to the decrease in revenues.
The good news for dividend growth investors is that the dividend continued to increase throughout this entire period. YUM was able to do this by allowing the payout ratio to increase from approximately 40% of earnings to 60% of earnings. As future earnings improve YUM is expected to restrain dividend increases as they allow the payout ratio to fall back toward 40%. Beyond 2016 I expect the dividends to once again increase at a level comparative to the rate of increase in earnings.
Estimated increases in revenue in 2014 is 4.89% and in 2015 is 10.20% Estimated increases in earnings in 2014 is 38.21% and in 2015 is 15.88%. Estimated increases in dividends in 2014 is 7.8% and in 2015 is 9.86%
The good news for dividend growth investors is that the dividend continued to increase throughout this entire period. YUM was able to do this by allowing the payout ratio to increase from approximately 40% of earnings to 60% of earnings. As future earnings improve YUM is expected to restrain dividend increases as they allow the payout ratio to fall back toward 40%. Beyond 2016 I expect the dividends to once again increase at a level comparative to the rate of increase in earnings.
Estimated increases in revenue in 2014 is 4.89% and in 2015 is 10.20% Estimated increases in earnings in 2014 is 38.21% and in 2015 is 15.88%. Estimated increases in dividends in 2014 is 7.8% and in 2015 is 9.86%
| Year 2015 Est 2014 Est 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 | Revenues $15.12 Bil $13.72 Bil $13.08 Bil $13.63 Bil $12.62 Bil $11.34 Bil $10.83 Bil $11.27 Bil $10.41 Bil $9.56 Bil $9.34 Bil $9.01 Bil $8.38 Bil | Earnings $3.94 $3.40 $2.46 $3.38 $2.74 $2.38 $2.22 $1.96 $1.68 $1.46 $1.27 $1.21 $1.01 | Dividends $1.67 $1.52 $1.41 $1.24 $1.07 $0.92 $0.80 $0.72 $0.52 $0.28 $0.22 $0.15 N/A | Payout Ratio 42.38% 44.70% 57.31% 36.68% 39.05% 38.65% 36.03% 36.73% 30.95% 19.17% 17.32% 12.39% N/A |
| Revenue Growth Rate 1 year = -4.04% 2 year = 1.80% 3 year = 4.82% 5 year = 3.02% 10 year = 4.55% | Earnings Growth Rate 1 year = -27.22% 2 year = -5.25% 3 year = 1.09% 5 year = 4.64% 10 year = 9.31% | Dividend Growth Rate 1 year = 13.70% 2 year = 14.79% 3 year = 15.13% 5 year = 14.38% 9 year = 27.95% |
The Technicals
From a technical perspective YUM once again finds itself moving higher from below the MACD centerline and bouncing off its lower Bollinger Band. These are good signs but they're not currently being confirmed by the ADX. This is a mixed message. The only information I can gain from the technicals is that there appears to be support at the lower Bollinger Band near $70 so the current price seems to be a very good entry point.
 Daily Chart |  Weekly Chart |
The Competition
Yum Brands, Inc is part of the Restaurant Industry which is part of the Services Sector of the economy. Below are a few of the major corporations included in this industry. They each pay at least a minimal dividend and they are listed in the order of their market capitalization.
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Conclusion
Although the P/E ratio will disturb dividend growth investors I feel this is an aberration resulting from the events occurring in China. I also feel that this problem is curable and that YUM is expending tremendous resources to fix the problem. As the situation improves, so will their earnings. In fact I believe that things will rapidly improve in 2014 and 2015. Based on that, I expect to initiate a position in YUM over the next couple of weeks. I believe this company can easily produce a return on investment of 15% or greater over the next 12 months and that it can once again grow its dividend 15% per year beginning in 2016. That kind of dividend growth is exactly what a dividend growth investor dreams about.
The Live Interactive Chart
Additional Articles of Interest
"The Restaurant Industry", published 24 July 2014
"Cracker Barrel Old Country Store", published 13 August 2014
"McDonald's Corp", published 16 August 2014
"Brinker International", published 25 August 2014
"DineEquity, Inc.", published 29 August 2014
"Texas Roadhouse", dated 12 September 2014
"The Restaurant Industry", published 24 July 2014
"Cracker Barrel Old Country Store", published 13 August 2014
"McDonald's Corp", published 16 August 2014
"Brinker International", published 25 August 2014
"DineEquity, Inc.", published 29 August 2014
"Texas Roadhouse", dated 12 September 2014
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