Yum! Brands, Inc. (NYSE:YUM) and YUM stock might not be on the value menu, but it would be a mistake to ignore the growth potential the company can realize once it attains greater focus. On Monday Yum stock moved one step closer. It would seem, however, investors don’t agree.
Shares of Yum Brands are moving in negative territory Monday, down about 85 basis points after the Taco Bell and Pizza Hut operator disclosed that its board has green-lit the company’s spinoff its subsidiary, Yum China Holdings, into a separate company. This is even though the company also increased its quarterly dividend by 11%.
From Yum Brands CEO Greg Creed:
“We are moving full steam ahead with the separation of Yum China, establishing two powerful, independent and focused growth companies dedicated to building on our brand strengths and unlocking the full value of each business for our shareholders.”
Yum China is expected to trade as an independent company beginning Nov. 1 under the symbol “YUMC,” according to Monday’s press release.
What This Means for Yum Brands Stock Holders
This move, which the company expects to finalize on Oct. 31, should have a boosting effect on YUM stock, considering that a separation will give Yum Brands an increased focus to grow its U.S.-based stores.
Now’s the time to want to hold YUM stock, which can still deliver value despite already posting year-to-date returns of 23%, crushing the 5% rise in the S&P 500 Index. For that matter, why not also hold shares in YUMC? It makes perfect sense.
Yum China, prior to the split from Yum! Brands, is far and away the restaurant leader in the Chinese market. Yum China accounted for more than 50% of Yum Brands’ revenue and profits and was a significant driver of YUM stock. Once the split takes effect, the Chinese consumer won’t suddenly stop eating at KFC or Pizza Hut. Both firms would be free to operate independently of each other and execute in a manner to serves the interest of both companies.
In the case for Yum Brands, growing its US-based franchise business has been a key focus. Expanding more franchises give Yum! Brands a larger base of recurring revenue from franchising fees, while also lessening its risk of operating each store. And given the rate at which labor wages and food inflation has impacted its peers like McDonald’s Corporation (NYSE:MCD) and Wendys Co (NASDAQ:WEN), Yum Brands has the right idea.
In short, at around $89 per share, investors should buy YUM stock now and expect it to hit $100 in the next 12 to 18 months. By then, its 46 cent per share quarterly dividend, yielding 2.1% annually would be an added bonus.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
