Yum! Brands (NYSE:YUM) initiated a new dividend yesterday. And while $0.10 a share may seem like a pittance, that $10 on a round lot of 100 shares goes a long way at any of the company's Taco Bell, KFC, and Pizza Hut restaurants.
We launched our Motley Fool Income Investor newsletter last year on the assumption that investors are looking to pad their capital appreciation with a steady flow of dividends. From assuring stable ownership to dissuading share dilution, returning earnings regularly to loyal investors has its advantages. Kinder tax treatment and companies like Microsoft (NASDAQ:MSFT) bursting at the seams have clearly helped populate the income-producing universe.
Shares of Yum! traded lower on the news, supposedly because investors were hoping for a meatier distribution, but that's a narrow-minded perspective. I mean, if you're talking cash-rich companies like Microsoft, Cisco (NASDAQ:CSCO), or Apple Computer (NASDAQ:AAPL), you might have a point. But while Yum! is milking three potent cash cows, it also has some debt to consider.
In initiating the payout, management also earmarked $300 million to repurchase shares and another $350 million to pay down its borrowed burden. Do investors really want that money going to them instead? Sure, you tack on that $650 million to the roughly $120 million the company will pay out over the next year in dividends, and the stock would yield better than 7%. That would certainly draw attention, but it would ultimately make for a riskier investment.
To its credit, Yum! has been paying down debt and buying back stock pretty much since PepsiCo (NYSE:PEP) spun the company off seven years ago. Over the last five years, it has cut its long-term debt by more than half while buying back $1.3 billion worth of stock. In this case, that is far more impressive than a fat yield. Yum! knows what it's doing. Leave the company in the kitchen and get back to consuming.
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Longtime Fool contributor Rick Munarriz thinks that Taco Bell uses too many adjectives and not enough Chihuahuas in its advertising campaigns. He does not own shares in any companies mentioned in this story.
