Yum Brands Inc. (YUM, Financial) is a hot topic of conversation as the company continues to impress with robust financial results and generous shareholder compensation. The stock has been subject to much praise on Wall Street, and key metrics corroborate the bullish outlook of the asset.
In an attempt to draw my own consensus about Yum Brands, I decided to juxtapose key influencing variables. I subsequently discovered that the stock might follow a favorable trajectory in the coming years.
Headline earnings review
Yum Brands released its fourth-quarter earnings report last month, revealing an earnings beat of five cents per share. Based on the company's pro forma report, it delivered an 8% year-over-year increase in entity-wide sales, with its KFC and TacoBell units exhibiting sales growth of 6% and 14% apiece.
Furthermore, the company's latest results conveyed share buybacks worth $4.1 million at an average cost of $119 per share. With the average buyback price in mind, the company's open market repurchases lowered the cost basis of its existing shareholders, illustrating Yum Brands' shareholder-driven ethos.
Lastly, Yum Brands CEO David Gibbs commented on the company's quarterly and fiscal results, saying:
"2022 was a landmark year for Yum as we beat our own industry record for unit development, opening an incredible 4,560 gross new units. Despite a challenging environment, we achieved widespread system sales growth of 8%, excluding Russia with $24 billion in digital sales, demonstrating that our iconic brands are more relevant, easy, and distinctive than ever. I am confident that our distinct competitive advantages, including our world-class franchisees and the industry's best talent, will drive accelerated growth in the future."
Fundamental analysis
A reduced form analysis of Yum Brands suggests the company's business and stock alike are in splendid condition. For instance, a recent sector-based survey by Citigroup and UBS concluded the restaurant industry is in top shape, with leading companies like Yum Brands displaying excellent balance sheets, driven by unit economics, market share and brand strength.
A narrowed-down analysis of Yum Brands highlights a few interesting factors that might play a big hand in investors' investment decisions. A closer look at the income statement shows most of its businesses passed down inflation costs to consumers during 2022's challenging economic environment as its KFC and TacoBell segments achieved positive bottom-line growth.
YumBrands' Pizza Hut was unable to pass down 3% of its core input cost rises to consumers. However, a lower inflationary environment in 2023, coupled with persistent demand for strong brands, will likely reverse the segment's fortunes.
Source: Yum Brands
Furthermore, Yum's Habit Burger units might soon add to the company's embedded growth. The division experienced a 12% increase in year-over-year sales in 2022. In addition, four new Habit Burger restaurants were added to the portfolio in 2022. In isolation, Yum Brands' Habit Burger units provide lucrative financial benefits; however, the real attraction is linked to the future synergies the chain could bring to its broad-based business model.
A final factor to consider is Yum Brands' internally generated cash. The company possesses $1.43 billion in cash from operations, which is critical in today's unfavorable interest rate environment as it allows Yum to resume its acquisition-based business while its smaller competitors might stagnate due to the scarcity of debt.
In my opinion, and based on Yum Brands' ongoing results, it can be concluded that the company continues to impress, lending analysts a reasonable basis to upgrade its long-term outlook in tandem with that of the restaurant industry.
Wall Street shares a uniform outlook
Wall Street analysts often disagree about the prospects of an asset. However, there is a uniform outlook for Yum Brands. For example, Bernstein recently dubbed it as the "LeBron" of quick-service restaurants, claiming that "YUM's secret sauce was to combine its strong structural capabilities with a well-crafted marketing positioning that capitalized on the Barbell effect, that sees low-income consumers chasing value and high-income consumers craving for more premium options."
Furthermore, Morgan Stanley believes Yum Brands is in the upper echelon of stocks to own for long-term investors. A recent note by the banking giant stated that its "brand positioning, menu and store footprints are in better shape, and digital channels are built out, helping KFC and PH compete in any economic environment and any country."
Based on the examples provided and my anecdotal opinion, Wall Street analysts love Yum Brands' stock for two reasons. First, Yum Brands is a moat stock, meaning its business model is largely uncontested, translating into significant profitability. Second, Yum Brands is a countercyclical stock, meaning it possesses the necessary traits to outperform the market throughout the macroeconomic cycle.
Valuation and dividends
Yum Brands' stock presents lucrative total return prospects. Apart from the fact its forward price-earnings ratio is priced more favorably than its current price-earnings multiple, the company pays its shareholders a compelling dividend.
Upon releasing its fourth-quarter results, Yum Brands' management increased its dividend policy rate by 6.1%, resulting in a now 1.87% forward dividend yield for the stock. Moreover, the company's dividends have grown by a compound annual rate of 10.7% over the past three years.
In essence, Yum Brands is a low-risk stock that presents consistent returns. Additionally, the company's sustainable dividend growth policy allows investors to benefit from a favorable dividend yield on cost.
Final word
A fundamental overview of Yum Brands suggests its stock is in great shape. Most of its businesses were able to pass along input costs during 2022 to preserve their bottom-line growth, which could widen when inflationary pressure eventually subsides.
Furthermore, various qualitative features, namely Wall Street consensus and industry surveys, indicate Yum Brands is in terrific shape.
Lastly, Yum Brands' most recent share repurchase program and its considerate dividend policy illustrate the company's dedication to its shareholders. Moreover, relative price multiples imply the stock is undervalued.
