Company Description: Yum! Brands, Inc. operates, franchises, or licenses the largest number of fast food restaurants in the world, with more than 40,000 units in over 125 countries, including the KFC, Pizza Hut and Taco Bell chains.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
YUM is trading at a premium to all four valuations above. When also considering the NPV MMA Differential, the stock is trading at a 45.4% premium to its calculated fair value of $54.89. YUM did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
YUM earned one Star in this section for 3.) above. YUM earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 2004 and has increased its dividend payments for 11 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
The NPV MMA Diff. of the $1,164 is below the $2,400 target I look for in a stock that has increased dividends as long as YUM has. If YUM grows its dividend at 10.6% per year, it will take 2 years to equal a MMA yielding an estimated 20-year average rate of 2.47%. YUM earned a check for the Key Metric 'Years to >MMA' since its 2 years is less than the 5 year target.
Peers: The company's peer group includes: McDonald's Corp. (MCD) with a 3.5% yield, Starbucks Corp. (SBUX) with a 1.4% yield, and The Wendy's Company (WEN) with a 2.0% yield.
Conclusion: YUM did not earn any Stars in the Fair Value section, earned one Star in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of one Star. This quantitatively ranks YUM as a 1-Star Very Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $57.94 before YUM's NPV MMA Differential increased to the $2,400 minimum that I look for in a stock with 11 years of consecutive dividend increases. At that price the stock would yield 2.8%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,400 NPV MMA Differential, the calculated rate is 13.4%. This dividend growth rate is above the 10.6% used in this analysis, thus providing no margin of safety. YUM has a risk rating of 2.25 which classifies it as a Medium risk stock.
YUM is trading well above my $58.89 calculated fair value. Its Free Cash Flow Payout at 72% and its Debt To Total Capital at 68% are both in excess of my established maximums. In addition, its current yield is well below my minimum. With all things considered, I will patiently wait for a more opportune time to initiate a position.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I held no position in YUM (0.0% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.
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Tags: YUM, MCD, SBUX, WEN,
