Restaurant operator Yum! Brands (NYSE:YUM) announced last week that it was authorizing a $1 billion buyback of its shares. With its stock recovering from its latest food scandal in China the share repurchase is a sign the owner of Taco Ball, KFC, and Pizza Hut is bullish on the future. However, should investors be worried that their company is wasting precious capital at a time that it should be investing elsewhere?
Yum! Brands buys big. Two years ago it authorized a similar $1 billion buyback and as if that were not enough it authorized an additional $750 million just a year ago. There's still $236 million remaining on that authorization and the current program will be in addition to that amount that's left over.
Clearly Yum! Brands management likes buying back its own shares.
So is throwing another $1 billion into reducing its share count further a good use of shareholder resources?
Investing in the future
But is all this spending going in the right direction? It generated $2.1 billion in cash in 2013, down almost 10% from the year before. And after reinvesting over $1 billion in capital improvements, and spending $615 million returning cash in the form of dividends, it spent $770 million on buybacks.
Building out more restaurants depends on location. Over the past few years existing restaurants haven't been generating a great deal of same store sales growth, particularly in the U.S., so that is most likely not the best use of capital.
Greater global focus
Overseas, though, management says the new units it builds, even in the face of falling sales, still exceeds its internal return hurdle rates, so it has no intention of slowing down the build out of international units. That might be a better use of its money.
Pay me now or pay me later
And investors ought to keep an eye on the role executive compensation plays in its push for share buybacks. In many ways it's tied to earnings per share, and reducing the share count artificially inflates EPS.
Investors look to executives to make investments in the long-term interests of the company. Yum! Brands and other companies insist these compensation practices align management's interest with those of shareholders and are "at risk" just like outside investors.
Rich Duprey 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.