Dividends don't only provide income for investors, they also say a lot about the strength of a business and management's vision of the future. Yum! Brands (NYSE:YUM), Philip Morris (NYSE:PM), and Royal Caribbean (NYSE:RCL) raised their dividends last week, so let's take a look at these companies and what recent dividend hikes could mean for investors.
Yum! Brands delivers a succulent dividend increase
Yum Brands raised its dividends by 11% on September 10, from $0.37 to $0.41 per share. The company started paying dividends in 2004, and it has consistently raised payments in the double digits since then, so this was the 10th consecutive year in which Yum! Brands increased payments by more than 10%.
The dividend yield stands at 2.3% after this increase, which is not particularly high. However, Yum! Brands has a comfortably low payout ratio in the area of 42% of earnings estimates for 2015, this leaves considerable room for further increases in the future.
Yum! Brands differentiates itself from rivals such as McDonald's because of its big exposure to emerging markets, especially China, where the company owns a total of 6,387 restaurants across its different brands as of the second quarter of 2014. China brings in approximately 30% of operating profits for Yum! Brands, and this is a huge growth driver for the company over years to come. On the other hand, China has also been quite a problematic market for the company lately.
Yum! Brands faced controversy over excessive use of antibiotics by poultry suppliers at its KFC division in China in 2012; this was followed by avian flu concerns in 2013. More recently, on July 20 of this year, a report in Chinese TV showed that one of its suppliers in the country was using meat past its expiration date. Management has recently estimated that same-store sales in China are expected to decline by 13% during the third quarter because of this problem.
Yum! Brands has managed to overcome its troubles in China in the past, and the big dividend increase announced last week seems to indicate that management is quite confident on its possibilities to rise above its difficulties in that crucial market once again. Chances are this is the most likely scenario; however, management needs to make sure to really put things in order with its Chinese supply chain once and for good.
Smoking hot dividends from Philip Morris
Philip Morris announced a 6.4% dividend increase on September 10, raising quarterly payments from $0.94 to $1 per share. After this hike, Philip Morris will be paying a big dividend yield of 4.8%.
During 2013 Philip Morris produced more than $10.1 billion in operating cash flows, while capital expenditures absorbed barely $1.2 billion of that money. Dividend payments demanded only $5.7 billion during the year, so the company generates more than enough cash flows to sustain dividend payments.
On the other hand, tobacco is a very risky business. Sales volume is globally declining, and there is no reason to expect a reversal in the trend anytime soon. Phillip Morris is buffering the decline in sales volume with price increases and cost discipline, so dividend payments are clearly sustainable from a financial point of view, at least in the middle term.
On a long term basis, however, price increases can only go so far to compensate for declining sales volume. As long as smoking rates continue falling, dividend payments from tobacco companies could be under pressure in the coming years.
Royal Caribbean is cruising ahead
The cruising industry has faced considerable headwinds over the last several years. A series of high-profile accidents involving ships operated by Carnival, such as Costa Concordia, Costa Allegra, and Carnival Triumph, have affected the industry's reputation for safety. In combination with a slow economic recovery, this forced different players in the business to compete for market share by lowering prices.
But Royal Caribbean seems to be successfully sailing through this environment. The company reported solid financial performance for the second quarter of the year, net yields increased 2.6% on a constant currency basis, and earnings per share came in at $0.66, considerably better than the $0.52 per share forecasted on average by Wall Street analysts, according to data compiled by Thomson Reuters. In a sign of optimism, management also raised its earnings per share forecast for the rest of the year.
The company announced a big dividend increase of 20% on September 9, bringing the dividend yield to 1.8% per year. The payout ratio is quite low, in the area of 34% of earnings estimates for 2014.
Chairman and CEO Richard D. Fain explained in the press release that the decision to raise dividends reflects Royal Caribbean's improved financial performance and sound prospects: "This dividend increase was made possible by the efforts of the overall organization to continue to improve our financial position. It demonstrates our commitment to increasing shareholder value and our confidence in our ability to continue to grow returns in the future."
When dividends talk investors should listen. Yum! Brands, Phillip Morris, and Royal Caribbean are expressing confidence on their future prospects, and they are doing so with more than words.
Andrés Cardenal 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.