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A Solid Share Buyback Program Meets A Solid Growth Play

Jul. 11, 2017 6:34 AM ETYum! Brands, Inc. (YUM)YUMC1 Comment
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Summary

  • Yum! Brands appears to be chasing McDonald’s in a battle of Billion Dollar fast-food chains with its latest focus on growing its stalwart Taco Bell brand into a $15 Billion.
  • Yum doesn’t have a particularly attractive dividend yield – but investors can expect its generous share buyback program to provide price support and boost future earnings.
  • Meanwhile, we expect Yum’s Taco Bell strategy, if executed properly, to add as much as $500 million to its earnings over the next 6 years.
  • This means that the stock is trading at a significant multiples discount to its industry peers. This is our case for why fair value of the stock is around $83 per share.

Analysis

Chasing the Golden Arches

Yum! Brands, Inc. (NYSE:YUM) capped the first half of 2017 with a 16.7% gain, right in line with the performance of the Dow Jones US Restaurants & Bars Index, which added 16.8% during the same span.

Yum’s performance trails that of McDonald’s, which added 28% in the first half. The disparity in performance is seemingly the result of weaker comparables growth – McDonald’s, now reaping dividends from its Experience of the Future initiative, saw global same-store sales rise by 4% – or double the 2% rate that Yum reported.

Still, Yum’s adjusted earnings grew by 17% in the first quarter compared to a year earlier (in Yum’s case, the adjustment removed $0.12 of earnings driven by re-franchising) – essentially on par with the 18% earnings growth that the Golden Arches reported. The question for investors is whether there’s scope to value Yum higher, considering its current 30-times trailing earnings multiple.

Average Dividend Yield but Strong Share Buyback Plan

Investors looking for a nice passive income pick-up from Yum can expect a fairly average dividend yield of around 1.64% compared to the industry average of 1.81%.

Even so, dividends aren’t the only capital being returned to Yum’s shareholders; the company is in the middle of a $13.5 Billion share buyback program (which is about halfway completed) that it expects to complete over the next two years (i.e. by 2019). This should reduce the company’s current share count by another 22% to 30% depending on its share price, while boosting the company’s earnings per share by as much as 43%.

The Mexican Connection

Unlike McDonald’s, which is still over 10 percentage points away from achieving its 95% refranchising target, Yum is already quite close to its 98% targeted franchise mix at 94%. A lot of this can

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Black Coral Research, Inc. is a newsletter designed to inform Dividend Investors how the latest news could impact the dividends of the companies they invest in. Feel free to contact us at BlackCoralResearch@gmail.com

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in YUM over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Black Coral Research, Inc. is a team of writers who provide unique perspective to help inform dividend investors. This article was written by Jonathan Lara, one of our Senior Analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article. Black Coral Research, Inc. is not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. Investing involves risk, including the loss of principal. Readers are solely responsible for their own investment decisions.

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