A Brief History of Yum! Brands' Returns (YUM)

A Brief History of Yum! Brands' Returns

By Motley Fool Staff | More Articles
December 1, 2011 | Comments (0)

Despite constant attempts by analysts and the media to complicate the basics of investing, there are only three ways a stock can create value for shareholders:

Dividends.
Earnings growth.
Changes in valuation multiples.

In this series, we drill down on one company's returns to see how each of those three has played a role over the past decade. Step on up, Yum! Brands (NYSE: YUM ) .

Yum! shares returned 436% over the last decade. How'd they get there?

Dividends helped quite a bit. Without dividends, shares returned 372% over the past 10 years.

Earnings growth was quite strong, driven by growing overseas expansion, particularly in China. Yum!'s normalized earnings per share grew an average of 13.6% per year from 2001 until today. That's about on par with rival McDonald's (NYSE: MCD ) , and far faster than other global consumer food and beverage brands like Coca-Cola (NYSE: KO ) .

And have a look at Yum!'s valuation multiple:

Source: S&P Capital IQ.

This is rare. Yum! is one of just a handful of companies to see its P/E ratio actually increase over the last decade. Most companies were overvalued a decade ago, and falling valuations ever since have capped shareholder returns even as earnings grow. Yum! found itself in the opposite situation: As valuations grew, shareholder returns actually grew faster than earnings.

That can't last forever. At a P/E ratio of 23, there likely isn't much more room for Yum!'s valuation to expand. Going forward, shareholders shouldn't expect to earn more than earnings grow -- still a nice return given the company's prospects, but unlikely to match the performance of the last decade.

Why is this stuff worth paying attention to? It's important to know not only how much a stock has returned, but where those returns came from. Sometimes earnings grow, but the market isn't willing to pay as much for those earnings. Sometimes earnings fall, but the market bids shares higher anyway. Sometimes both earnings and earnings multiples stay flat, but a company generates returns through dividends. Sometimes everything works together, and returns surge. Sometimes nothing works and they crash. All tell a different story about the state of a company. Not knowing why something happened can be just as dangerous as not knowing that something happened at all.

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Fool contributor Morgan Housel doesn't owns shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of Yum! Brands and Coca-Cola. Motley Fool newsletter services have recommended buying shares of McDonald's, Coca-Cola, and Yum! Brands. 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.

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