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.