Yum! Brands (NYSE:YUM) operates a fast-food empire through a few major brands that collectively generate billions in sales every year. Yum! is the parent company of Taco Bell, Pizza Hut, and KFC. While fast food isn't growing like it used to in the United States, it's a much different company overseas. Yum! is growing like a weed internationally, particularly in emerging markets such as China.
Because of emerging-market growth, Yum! has had a great year. Sales and earnings are soaring, and the company expects its full-year results to be equally impressive. Not surprisingly, this allowed Yum! management to recently pass along a significant dividend increase, which should help satisfy investors' hunger for income. Last week Yum! announced that its Board of Directors had approved an 11% increase in the company’s quarterly dividend, bumping it from $0.37 per share to $0.41 per share. This will raise the annual dividend to $1.64 per share, which brings a dividend yield of 2.3% at Friday's closing share price.
Here are some recent developments at Yum!, including its solid dividend increase, and what investors should know.
Recovery takes hold
Investors may recall the food quality scare in China last year that swept Yum! up in a whirlwind of negative publicity. While this might seem like a distant memory, it's had an effect on Yum!'s results this year. That's because Yum! has benefited from very easy comparisons in its earnings results. Since earnings declined dramatically last year, its results this year look that much better. For example, Yum! has posted earnings growth rates of 24% and 30% through the first two quarters of this year, respectively.
Nevertheless, it's a great sign that Yum! is in the process of a strong recovery. Management is confident that the recovery will last through the remainder of this year, forecasting at least 20% growth this year. Not surprisingly, China is doing a lot of the heavy lifting. Last quarter, the company's total worldwide sales increased 6%, benefiting hugely from 21% revenue growth in China.
Emerging markets are a huge focal point for management, and it's easy to see why. Faster-growing economies in Asia and the Middle East are carrying the weight, while more mature markets like the United States level off. Yum! is also growing strongly in India, where sales grew by 18% last quarter.
Because of these impressive growth rates in under-developed markets, Yum! management intends to aggressively open new restaurants in these places. Yum! plans to open 1,250 new international locations this year, which would represent a record for the company. This includes opening 700 restaurants in China alone. This should help keep sales growth intact going forward.
The success is passed along
A great aspect of investing in Yum! Brands is that it is committed to sharing its success with its investors. To demonstrate this, the company has a track record of raising its dividend at very high rates. Management recently upped the dividend by 11%, marking the 10th year in a row in which Yum! has increased its dividend by a double-digit percentage rate.
The future annualized dividend is now $1.64 per share, which provides investors with a 2.3% yield. Yum! has now increased its dividend by 14% compounded annually over the past five years, which means investors' income potential from owning Yum! stock is very impressive. Additional dividend growth is likely based on the company's solid earnings growth potential due to its aggressive growth plans, as well as its conservative payout ratio.
Yum!'s free cash flow payout ratio stands at 48% over the first half of the year. The company generated $676 million in free cash flow and paid $327 million to investors in dividend payments. The fact that Yum! distributed less than half of its free cash flow over the first half of the year means the company has plenty of financial flexibility to keep increasing its dividend in future years.
Yum! has a strong growth plan in emerging markets, driven by hundreds of new restaurant openings. It generates a lot of cash flow, and management is committed to the dividend. Add it all up, and its streak of double-digit dividend increases should remain intact for the foreseeable future.
Bob Ciura has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.