Yummy Profits Assured

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It’s a fact well known to all, if a company has good fundamentals, with a steady increase in topline, the financials more often than not, would appear impressive to investors. If historically the company was able to withstand the recessionary years, with minimal damage, the pick becomes all the more lucrative. Slap in a decent dividend along with rapid expansion plans, and voila, profits on a platter are served. As of now, Yum Brands (NYSE: YUM) is serving the platter, and here are a few reasons why you should have it.

Yum Brands is a US based company, which has major global leading food chains Pizza Hut, KFC and Taco Bell in its possession. The restaurateur has its presence in more than 120 countries with nearly 38000 restaurants around the globe. Yum brands features in the Fortune 500 companies and in 2011 alone, the company was able to open 965 restaurants around the globe.

The company has huge exposure in China with 49% of its revenues coming from the country. There are concerns about the slowing down of the country, as quarterly the economy grew at 7.6%, which is considerably down since 2009. Also double digit inflation reported in the country is a cause of worry for Yum Brands as its expenses are set to increase. In the previous quarter, the operating profits of the Chinese division shrunk by 4.1% owing to inflationary pressures. To counter this, the management of the company recently announced that it would be increasing its prices, and expects the profits to grow in double digits in the second half of the year. The company has 4790 existing outlets in the country and expects to add around 600 new outlets, in 2012 alone.

Yum Brands is also bullish on India, as the company would be adding 100 new outlets in 2012 alone. Currently the restaurateur has 479 outlets in the country, and by 2020 the company expects the number to increase to 2000. The revenues from India saw a 32% jump, due to the recent 29% increase in the number of outlets throughout the country. The company would be increasing its prices in India too, in a bid to expand its profit margins.

Very recently it was announced that the company has increased its dividend yield by 18%, pushing the yield up from 1.66% to nearly 2%. The company has been paying out its dividends consistently since the past 8 years, and since there aren’t any strains on the company’s future or on its books, I believe that the payouts will be continued in the future.

Comparing the performance of Yum Brands to its peers McDonalds (NYSE: MCD) and Dominos’ Pizza (NYSE: DPZ), we can notice from the chart attached that over the last 10 years Yum Brands has outperformed its peers in terms of stock returns. Also we can notice that the stock wasn’t affected much during the recessionary years.

<img src="/media/images/user_13723/yum_2_large.JPG" />

On comparing the financial metrics of the companies, we can conclude that Yum Brands has the best mix of numbers. The company boasts of a good mix of dividend yield and retained earnings. Retained earnings are important as the companies needs to expand consistently in order to keep growing. Domino’s Pizza has 100% retained earnings, but its return on equity is far less compared to Yum Brands, and to top it all Yum brands has the lowest PEG ratio.

<table> <tbody> <tr> <td> <p>Company</p> </td> <td> <p>Dividend Yield</p> </td> <td> <p>Retained Earnings</p> </td> <td> <p>ROE</p> </td> <td> <p>PEG</p> </td> </tr> <tr> <td> <p>Yum Brands</p> </td> <td> <p>2%</p> </td> <td> <p>65.38%</p> </td> <td> <p>77.56%</p> </td> <td> <p>1.62x</p> </td> </tr> <tr> <td> <p>McDonalds</p> </td> <td> <p>3%</p> </td> <td> <p>49.72%</p> </td> <td> <p>37.93%</p> </td> <td> <p>1.83x</p> </td> </tr> <tr> <td> <p>Domino’s Pizza</p> </td> <td> <p>0%</p> </td> <td> <p>100%</p> </td> <td> <p>37.88%</p> </td> <td> <p>1.77x</p> </td> </tr> </tbody> </table>

Yum Brands is small company with a mid-cap company with a market capitalization of nearly $2 billion. The company with its expansion plans has a tremendous growth opportunity, and the numbers along with its comparative stock performance, makes me bullish on the stock over the long term future.


PiyushArora has no positions in the stocks mentioned above. The Motley Fool owns shares of McDonald's. Motley Fool newsletter services recommend McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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