It's no secret that fast-food joints are under pressure. Not only are customers migrating because of the perceived risk of eating highly processed foods, but fast-casual restaurants are also encroaching on what was once an untouchable market share.
But for Yum! Brands (NYSE:YUM)-- parent of Pizza Hut, Kentucky Fried Chicken, and Taco Bell -- this is only half of the story. In the past, the company has mitigated some of these concerns by focusing on heady growth abroad, particularly in China. The Middle Kingdom is home to a whopping 6,400 Yum! Brands locations.
So what should investors be watching moving forward? And how healthy is the company's dividend? Read below to find out.
The dividend investor's most important metric
If you are investing in a company for its dividend, there's no number you should watch closer than free cash flow. It is from this cash flow, after all, that the dividend is paid out -- and it is the health of this cash flow that will determine what the dividend will look like in the future.
Here's how Yum! Brand's free cash flow situation has looked since 2009.
There are two takeaways from this chart. First, Yum! Brands has consistently raised its dividend. In fact, when combined with the company's buyback plans, the payout has increased at a very healthy 16% per year!
Second, the company's free cash flow situation has varied wildly. Between 2011 and 2013, the metric shrunk 12%, only to shoot up an astounding 38% during the first six months of this year. The good news for investors is that the dividend has never been in danger, as the payout ratio has ranged from 35% in 2010 to 56% last year -- well within a margin of safety.
Concerns about China
Though the stock handily outperformed the broader market coming out of the Great Recession, Yum! Brands has fallen on tough times. As you can see below, 2013 was not a banner year for the company in China, as concerns about avian flu and the sanitary conditions at suppliers' warehouses kept customers away.
The story in 2014 has been two-sided. On one hand, sales in China picked up again nicely: In the first and second quarters, same-store sales were up 9% and 15%, respectively.
However, in late July, the stock tumbled 17% on renewed fears over the safety of the company's food. This time, the culprit was Shanghai Husi Food, which is a huge supplier of meat to U.S. chains operating in China. Undercover reporters documented how tainted and expired meat was mixed with fresh meat being sent to restaurants.
While Yum! Brands wasn't alone in receiving the meat, the fact that this is the second such scare in as many years could signal a loss of trust on behalf of the Chinese citizenry.
Is the stock a buy?
Any consideration on buying the stock should carefully weigh how you think Yum! operations in China will fare. The nation accounts for over half of all Yum! revenue. If you believe the company can recover -- as it was beginning to do at the start of 2014 -- then there should be better days ahead, with a healthy dividend to boot.
If, however, you believe the company's customers in china have had enough with the company's tainted meat, this might not be a stock for you.
Brian Stoffel 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.