Yum Brands Stock: Cover Launch on Fast Food Behemoth (YUM)

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Start of coverage

We’re throwing a cover on Yum! Brands (NYSE: YUM) and recommend that investors buy the shares for capital preservation. Yum! Brands operates global fast food franchises that can provide stable financial growth and continue to build shareholder value through dividend increases and share buyback programs. We believe the current valuation is attractive at a historic level and we appreciate the growth in the dividend yield going forward.

Company presentation

Yum! Brands is an American fast food company based in Louisville, Kentucky. The fast food company operates famous fast food brands, such as KFC, Taco Bell, Habit Burger Grill and Taco Bell around the world except China. The company operates more than 53,350 restaurants and has a market capitalization of $32.08 billion. The company’s year-to-date stock price performance has closely tracked the S&P 500. Yum! Brands posted a -17.62% return compared to a -16.81% return for the S&P 500.

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YUM Data on Year-to-Date Total Returns (Daily) by YCharts

Recession proof

Fast food chains are well known for being recession proof, and Yum! Affiliates of brands are no different. Fast food brands like Yum! The brands are considered recession-proof due to the fact that their products are less expensive than other restaurants, and also because they use franchise models that generate more predictable cash flow. Although we cannot yet see the immediate impact of the economic downturn on Yum! Brands’ financial performance, the most recent quarterly performance was solid, with revenue growth of 2% year-over-year for the second quarter of 2022. Taco Bell was a particularly bright spot for the company, with management recording 10% year-over-year growth in system sales growth and 8% year-over-year growth in same-store sales growth. We believe the combination of low cost products and franchise model will make this company fairly resilient to a severe downturn.

Presentation of Q2 2022 results

Presentation of Q2 2022 results

Shareholder friendly policies

Yum! Brands recently announced a quarterly dividend per share of $0.57, which equates to an annualized $2.28 per share. Based on the current price, this translates to an annual dividend yield of around 2.03%, which is a little higher than the S&P 500 dividend yield of 1.69%. Over the past 5 years, growth in dividend yield has been strong, with the quarterly dividend increasing at a CAGR of 13.7%. Based on the chart below, we see that dividends have been steadily increasing each year despite stagnant revenue and bottom line. While we would like to see revenue and net income increase as well, we are pleased to see the company’s commitment to increasing the shareholder dividend. We think this dividend is quite sustainable given that the current payout ratio is around 42.9%. In addition to this, the company has also authorized a $2 billion buyback program in 2021 which will last until the end of this year. The company has a long history of share buyback programs, and we believe that management will continue to be proactive in increasing shareholder value through such programs.

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YUM data by YCharts
Yum!  Brands

Yum! Brands

Evaluation

The historical valuation range of Yum! Marks have been fairly consistent, with a P/E ratio floor of around 16x and a ceiling of around 32x. Currently, the P/E ratio is 22.59x and is in the middle of the valuation range. We believe the stock is currently attractively valued, even based on a historic range, and can provide good capital preservation in the event of an economic downturn. Using a Gordon growth model, we also find that the stock is slightly undervalued based on a $2.28 annual dividend and 5% perpetual growth. The required rate of return of 6.93% is taken from the average cost of capital for the restaurant and restaurant industry from NYU Stern’s database. Based on our assumptions, our model represents an increase of about 10%.

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YUM P/E Ratio data by YCharts
Sweet minute capital valuation

Sweet minute capital valuation

Conclusion

We’re throwing a cover on Yum! Marks and recommend a BUY rating. We appreciate the recession proof fast food chain business and strong dividend growth the company has provided over the past 5 years. With a low dividend payout ratio and a history of strong buyback programs, we believe the company can provide good shareholder value appreciation even during an economic downturn. We recommend investors buy the stock given the reasonable valuation based on historical levels and based on our valuation model.

About Walter Bartholomew

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