Restaurant operator YUM! Brands (NYSE:YUM) owns the KCF, Pizza Hut and Taco Bell brands. It operates both in the U.S. and elsewhere. Chinese units accounted for about 44% of last year’s revenues and 42% of operating profits. Profits have been on a roll (or a taco shell) since the last down year-over-year comparison was posted in 2001. The 2001 recession year saw split-adjusted EPS of $0.81. 2011 came in at $2.87.
Dividends were initiated in 2004 with 15-cents being paid. The quarterly rate was recently increased to $0.335 ($1.34 annualized). At Tuesday’s closing price of $73.97 YUM had a current yield of 1.81%
What’s not to like?
All that good news has been baked into the pizza crust, packed into the burritos and stuffed into KFC’s chickens. The current quote represents 23.8x trailing EPS and 20x what may prove to be optimistic 2013 estimates of $3.70.
To understand why both the P/E and yield now look unappealing simply look back at where YUM has traded historically. Whenever YUM’s multiple went above 22x long-term investors faced substantial time periods of stagnating share prices.
Buy-and-hold types who entered YUM in early 2005 paid 22.4x trailing EPS. They received just 0.67% yields. The stock didn’t break out permanently above that level until mid-2009. Buyers in early (pre-recession) 2008 snapped up YUM on momentum at $41.70 (and 23.8x EPS). Those who ignored valuation ended up waiting more than two years just getting back to even.
Traders who were seduced by YUM’s 2011-to-2012 run from $48 to almost $75 are now sitting slightly below last April’s pinnacle. That occurred even while YUM is in the midst of another all-time record year.
The messages are clear:
Current holders should consider selling. Those wishing to own YUM should show some patience. I’d look for an entry price below $60.
Good news may not help from today’s rich price. Negative surprises could be quite painful.
Disclosure: No position
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