(YUM) Yum! Brands Announces Board Approves Share Buyback

Louisville, Kentucky-based Yum! Brands Inc. (YUM) recently announced that its board has approved the share repurchase of an additional $750 million. The company has been consistently enhancing shareholders’ returns. The world’s largest restaurant company will buy back shares over the next 18 months.

The owner of KFC, Pizza Hut and Taco Bell chains currently has $250 million of share buyback remaining under the $750 million share repurchase authorized by the board in January 2011. The previously announced that the share repurchase program will expire on June 30, 2012.  In the recently reported quarter, the fast food company purchased 4.6 million shares at an average price of $51.55.

The board has also announced a dividend payment of 28.5 cents per share on February 3, 2012 for shareholders of record as on January 13, 2012. The company has increased its dividend each year since the initiation of the program in 2004. Each annual increase has seen a double-digit percentage rise.

The dividend policy continues to target a payout ratio of 35–40% of the annual net income. During the last five-year period, Yum! Brands’ dividend has grown at a rate of 32.8% – faster than the industry average of 6.1%.

The world’s largest restaurant company in terms of system restaurants, with more than 38,000 restaurants in over 110 countries, intends to build shareholder value and return cash to shareholders through share repurchases or dividends. Since 2004, the company has returned over $2 billion and $6.5 billion via dividend and share repurchase programs, respectively.

Yum! Brand’s China Division offers immense growth potential with its two leading brands KFC and Pizza Hut. Management’s earnings growth model includes annual operating profit growth of at least 15% in the China Division. Moreover, the company is focusing on franchising which require less capital and stabilize cash flow generation. Cash and cash equivalents stood at $1.2 billion as of September 3, 2011 and the company is suitable rewarding its shareholders.

One of its competitors McDonald’s Corporation (MCD) has also been consistently enhancing shareholder returns. During the third quarter, the company repurchased 10.5 million shares for $909.6 million and paid a quarterly dividend of $0.61 per share or $627.2 million. In 2011, McDonald’s expects to return $6 billion through share repurchases and dividend payment to shareholders.

We appreciate Yum! Brands’ concerted efforts to consistently boost long-term shareholder and franchise value even in times of an economic downturn. The company has one of the highest returns on invested capital in the Quick Service Restaurants industry. We believe that an increase in share buy-back authorization affirms the company’s optimistic outlook and shows that it is heading toward strong growth.

Yum! currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.

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