Yum! Brands, Inc.: This Controversial Strategy Has Led to Big Profits
A Top Dividend Stock for 2019
Today, we’re checking in on a controversial-but-profitable investment strategy.
Regular readers appreciate the power of investing in habit-forming products. Certain goods, like coffee, alcohol, and fast food, have a certain addictive quality—or at least, they lead to bad habits that become difficult to break. Some critics might frown on the establishments that supply these products. But the truth is, these businesses generate outrageous profits.
Case in point: Yum! Brands, Inc. (NYSE:YUM), the company behind a number of top fast food chains like Kentucky Fried Chicken, Pizza Hut, and Taco Bell. Over the years, management has added more healthy options to their menus, but people really crave their pizza, fried chicken, and cheese-stuffed burritos. Customers know these products add inches to their waistlines, yet they don’t care.
You can see the success of this business in Yum! Brands’ recent financial results. Last quarter, the company reported system-wide sales jumped five percent year-over-year. Operating profits increased 14% from the same period in 2017. Earnings per share, excluding special items, have soared 37% year-to-date.
But the number that really impressed analysts came from margins. Yum! Brands, Inc. now earns $0.38 in operating profits on every dollar generated in sales. That put the company in an elite league of top businesses in the world.
“We are pleased to deliver third-quarter system sales growth,” said Chief Executive Officer Greg Creed. “The collective power of our three iconic brands, anchored by our four key growth drivers, is helping us deliver long-term sustainable growth and higher returns for our stakeholders.” (Source: “Yum! Brands Reports Third-Quarter GAAP Operating Profit Decline OF (14)%; Delivers Third-Quarter Core Operating Profit Growth of 2%; System Sales Growth of 5%,” Yum! Brands, Inc., October 31, 2018.)
Investors seem pleased, too. And as you can see from the chart below, shares of YUM stock have closed in on a fresh all-time high. Since we first wrote about YUM stock in March 2015, it has delivered a total return, including dividends, of 74.6%.
Chart courtesy of StockCharts.com
Shareholders can expect those higher profits to translate into growing dividends. Historically, YUM stock has boosted its distribution each January. That by no means guarantees that Yum! Brands, Inc. will follow through with another hike this year. But given the company’s bulging profits, I wouldn’t be surprised to see another large increase in 2019.