Does Yum! Brands Still Taste Good?

Yum! Brands (YUM) announced first quarter ended March 31, 2016 total revenue of $2.62 billion and somewhat same as first quarter of 2015 total revenue.

Yum! declared first quarter of 2016 net income of $391 million or $0.93 per diluted share, up 8 percent year-over-year from $362 million or $0.81 per diluted share in first quarter of 2015. Moreover, the company has raised its complete year major operating profit expansion guidance to about 12%, from 10% as declared earlier.

The global US-based food company reported continued year-over-year bottom line growth primarily driven by the key gains from the strategic spin-off of the company’s Chinese division and continued benefits received from the ongoing weaker global commodity demand and pricing environment, enhancing the company’s key margins.

Focus in the right areas

Yum! is focused on developing two innovative high-growth companies with the strategic spin-off but, having different investment characteristics.
Yum! China is believed to become an equity-led company with its 100% geographic presence in mainland China and having high capital intensity with only limited leverage capacity. The primary investment intention behind forming Yum! China is to develop the company into superior-growth purely dedicated to China’s consuming class. Yum! Ex-China is expected to become a franchise-led company having its geographic presence in over 130 countries with low capital intensity and high leverage capacity. The key purpose of forming Yum! Ex-China is to portray it as a high-growth franchise enabled pure-play Company having three major brands.

Yum! Brands has unrivaled and industry-leading collection of key food brands having a total of about 43,000 restaurants and consistently expanding, going forward. KFC is operating in nearly 125 countries with about $23 billion of consolidated system sales and approximately 20,000 restaurants. Pizza Hut operates in approximately 100 countries globally with about $12 billion of total system sales and nearly 16,100 new restaurants. Taco Bell has operations in about 25 nations worldwide with nearly $9 billion of combined system sales and approximately 6,400 key restaurants.

The planned separation of Yum! Brands into two high-growth companies is believed to enable the core brand to give greater focus on developing the two companies strongly and separately, driving sustainable long-term growth for the core brand while delivering attractive shareholder returns through strategic dividend payments and timely share repurchases.

Yum! Brands has repurchased approximately $2.0 billion worth of its common stock at an average cost of $72 till 19th May 2016 and targets on returning a total of nearly $4.2 billion through strategic share repurchases authorized till December 31, 2016 while offering $0.46 per share of quarterly dividend on its common stock.

A smart move

The unique division of Yum! Brands into two different high-growth companies is believed to deliver excess returns compared to the consolidated brand with Yum! China keen on focused investments in China with robust national presence and significant expansion potential. Yum! China is focused on delivering nearly 15% yearly continued earnings growth. Whereas, New Yum! is expected to be a superior-margin international franchise company with key worldwide growth and targets on delivering nearly 15% yearly continued shareholder returns.

The American food major seems hugely focused on delivering double digit company growth while offering attractive shareholder returns which is in line with its continued commitment to return a majority of the invested capital to the key stakeholders in form of dividends and strategic share repurchases.


Overall, the investors are advised to “Buy” equity in Yum! Brands, Inc. considering the company’s significant near-term and long-term growth prospects being strengthened by its solid expansion efforts while strategic restructuring to enhance the company’s overall financial position. The PEG ratio of 1.81 indicate healthy company growth and comparable to the industry’s growth average of 1.54. The profit margin of 10.09% seems impressive. However, Yum! Brands needs to optimize its debt-burdened balance sheet with significant total debt of $4.83 billion against weaker total cash position of $934.00 million only, restricting the company to make future growth investments.
Published on Jul 6, 2016
By Subhen Mittra

Copyrighted 2016. Content published with author's permission.

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