Dividend Report Card: Yum! Brands

In this series, we analyze financial metrics to begin answering the following questions about a company's dividend:

  1. Over time, has this company steadily increased its payouts?
  2. How sustainable is the dividend?
  3. Does the company have room to further increase the dividend?

The Dividend Report Card wasn't designed as a buy or sell signal but rather as a tool to gauge the health of a company's dividend. For a full explanation of each category, click here for a tutorial.

Today's pupil is Yum! Brands (NYSE: YUM  ) , which posts a 2% yield.

Dividend history

Metric

5-Year Annualized Growth Rate

Dividend per share 32.8%
Diluted earnings per share 13.2%

Source: Capital IQ, as of Feb. 10.

Yum! Brands has only paid a dividend since 2004, but it's increased its payout each year -- and at a very high rate, to boot. It's a very encouraging, albeit brief, track record.

Nevertheless, past returns don't guarantee future results, so dividend history is only 10% of the final grade. Yum! does, however, score a 5 of 5 in this category.

Sustainability

 Metric

Trailing 12 Months

Final Grade
Weighting

Report Card Score
(out of 5)

Interest coverage 10.5 times 10% 5
EPS payout ratio 35.6% 10% 5
FCFE payout ratio 39.7% 30% 5

Source: Capital IQ, a division of Standard & Poor's, as of Feb. 10.

Even though Yum! has increased its dividend quickly, it has wisely not paid out more than it could afford.

At first glance, the company appears to have a strong balance sheet, but its credit ratings --- i.e., BBB+ at Morningstar, BBB- at Standard & Poor's -- while undeniably investment-grade aren't immaculate, either. Morningstar, for example, said that the company's off-balance sheet operating leases (a common thing for retailers and restaurants) added to the company's overall obligations and reduced the operating profit coverage of those obligations.

Growth

Metric 

Trailing 12 Months

Final Grade
Weighting

Report Card Score
(out of 5)

EPS payout ratio 35.6% 10% 4
FCFE payout ratio 39.7% 20% 4
Sustainable growth rate 54.5% 10% 5

Going forward, it doesn't seem likely that Yum! will be able to raise its dividend at a 30%-plus clip over the next five years, but that's OK.

The company's stated dividend policy is to pay out between 35% and 40% of its net income, and given the median analyst estimate for long-term earnings growth of12%, low double-digit dividend growth over the next five years isn't out of the question. Yum! certainly has the earnings and free cash flow cover that makes that growth rate seem feasible.

Competitors
An "ungraded" section of the dividend report card is to see how a stock's current yield stacks up against that of direct competitors. If it's too high relative to competitors' yields, the board could be tempted to slow the growth rate, or vice versa, to bring it more in line with the industry average.

Company

Dividend Yield

Median Analyst Est. Long-Term EPS Growth

McDonalds (NYSE: MCD  ) 3.2% 10%
Wendy's/Arby's Group (NYSE: WEN  ) 1.6% 14%
Starbucks (Nasdaq: SBUX  ) 1.6% 18%

With its current yield at 2%, Yum! Brands' dividend is in a Goldilocks position -- not too high, not too low relative to its peer group.

Pencils down!
With all the numbers in, here's how Yum! Brands' dividend scored:

Weighting

Category

Final Grade

10%

History

5

  Sustainability  

10%

Interest Coverage

5

10%

EPS Payout Ratio

5

30%

FCFE Payout Ratio

5

  Growth  

10%

EPS Payout Ratio

4

20%

FCFE Payout Ratio

4

10%

Sustainable growth

5

100%

Total Score (out of 5)

4.7

  Final Grade

A

Even if we downgraded Yum! Brands' balance sheet score to a "3" to account for operating leases, it would still score an "A-." Bottom line: the dividend looks quite healthy.

Want some more dividend ideas? Click here for a free report from Motley Fool expert analysts: "13 High-Yielding Stocks to Buy Today."

Todd Wenning is advisor of Motley Fool UK Dividend Edge. He does not own shares of any company mentioned. Morningstar and Starbucks are Motley Fool Stock Advisor recommendations. The Fool owns shares of Morningstar and Yum! Brands and has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 10, 2011, at 7:02 PM, dbisc1 wrote:

    I wouldn't won't to be in food stocks now or near future do to the sharp rise in prices do to hit. To many other places safer like MO! The godfather of all dividends, consistentency, and safety.

  • Report this Comment On February 11, 2011, at 12:09 AM, WRobinsonJr wrote:

    @dbisc1 - First I disagree with your comment on food stocks. Second I disagree with your stock pick MO. Profiting from smoking in America has peaked (in my opinion) however, profiting from the smoking of the rapidly increasing middle class in developing nations would be a much better medium/long-term game plan...In my opinion.

    So if investing in smoking is your thing... do you research on NYSE:PM. It could prove to be a good medium/long-term holding game plan.

  • Report this Comment On February 11, 2011, at 12:16 AM, WRobinsonJr wrote:

    YUM is Yummy :-)

    If they are successful in ditching A&W and Long John Silver, the company will hopefuly see significant gains this year.

    While I am not an expert, if I had to assume, the part of the company that is up for sale is the part that is seeing operating profit problems. YUM is shooting darts at China and is hitting a bullseye each time.

    This is a long-term hold for me

  • Report this Comment On February 14, 2011, at 2:46 PM, Borbality wrote:

    Long YUM! Hoping to hold a long time.

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