The owner of Pizza Hut, KFC and Taco Bell, Yum! Brands (YUM, Financial) is planning to make its investors happy by increasing their returns. The fast food restaurant chain will be paying out around 40% to 45% of its annual adjusted profit. The company recently declared a dividend hike of 11% percent, thanks to its significant cash flow. The company says that not only does it have “substantial” cash flow to reinvest in the business for expanding operations, but it is enough to reward investors through better dividend payment and share buybacks.
The company has raised its quarterly payout from $0.37 to $0.41. The company has also asserted that in the long term its wishes to further increase the dividend payment with a dividend payout ratio going up to 40% to 45%.
Data taken from Morningstar
The past numbers
In the chart above, it can be distinctly noticed that the American fast food major increased the payout ratio to more double in 2005 compared with the previous year level, though net income in 2005 rose by 3% only. It again increased the payout ratio to 31% in 2007 from 18% in the previous year. The dividend payout ratio since then has seen a steady rise through 2012. However, in 2013 the ratio shot up to 58%, up from 35% in 2012. This happened because Yum! Brands’ net income fell more than 31% in 2013. So to maintain the dividend payout to shareholders, the company had to increase the payout ratio.
The company desires to pull up its payout ratio and settle it in the range of 40% to 45% in the future. Yum! Brands is not very positive about its third quarter earnings in China, which is the key market driving the company’s revenue. The chicken supply issue continues to be a pain for the company, pulling down its sales and profit from the lucrative market. For the quarter ended August, Yum! Brands predicts sales to drop 13% year over year in the mainland.
Future growth prospects
Since the home market is growing more health conscious, both Yum! Brands and domestic peer McDonald’s (MCD, Financial) are looking out for opportunities in the emerging markets. While China has fueled Yum! Brands’ growth to quite an extent, the company has also faced several issues in the economy that has hurt its brand image. This has had an impact on the company’s top and bottom lines. And since Yum! Brands has a much greater presence in China compared with McDonald’s, it tends to gain more in good times and lose more during hardships.
However, the company hasn’t given up. It has solid marketing strategies along with heavy expansion plans in China. It has opened 104 new outlets in the country in the latest quarter and targets to open more than 700 restaurants in the year. During the quarter, total sales went up 21% as same store sales grew by a healthy 15%. Restaurant margins expanded 6 percentage points and operating profit showed a commendable growth, more than twice of what it registered last year. The company’s management forecasts Yum! Brands earnings to grow by a minimum of 20% in the current year. This should be pleasant news for investors.
Parting thoughts
Dividend investors are highly interested in the growth and earnings prospects of the company they invest in. Yum! Brands may be facing few hiccups due to the challenges in China, but the quick service restaurant chain has overcome many such difficulties here in the past and is quite capable of crossing the hurdle again. The company has effective strategies to recover in the mainland. Once Yum! Brands manages to restore its lost glory and regain the confidence of its Chinese customers, there’s no stopping the fast food goliath. Investors should therefore stay upbeat about the stock.
