Why YUM! Brands, Inc. Stock Is More Than a Stock

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There are a few companies and sectors that I consider to be core holdings of any long-term diversified portfolio. That’s because they involve something that is truly fundamental to the human experience, something that has become so intertwined in our DNA that we could not do without it. These are securities that my stock advisory newsletter, The Liberty Portfolio, aims to hold as core positions.
Why YUM Stock Is More Than a Stock

However, there is another class of stocks that I don’t think of as essential to human existence, but which play a major role. They are emblematic of the global economy. Yum! Brands, Inc. (NYSE:YUM) is one such stock.

YUM stock is, of course, the parent company of KFC, Pizza Hut and Taco Bell. Together, they account for over 43,500 restaurants in 135 countries. Why do I consider this trio of brands so important, and why might you want to consider YUM stock for your portfolio? There are several reasons.

First, YUM stock sells food. This is the single most basic item humans require, other than water, to survive. Food will always sell and will always have some base level of business.

However, YUM doesn’t just sell any food, but food that is cheap. As one Taco Bell franchise owner told me many years ago, “Business is either good or great. It is never bad.”

Not only is the food cheap, but it offers a basic level of nutrition. I’m not saying that the food is “healthy” necessarily, although some menu items at YUM restaurants might legitimately be considered as such. I’m saying that it offers a basic level of nutrition. People can get by eating it on a regular basis. There are plenty of worse things to eat than, say, Taco Bell’s “fresco” menu items or KFC’s grilled choices.

All of this leads to a fact that may astonish investors. Most people think that those in the lower income brackets are more likely to eat fast food. It turns out that this is not true. Fast food such as YUM stock brands are enjoyed equally across all income demographics. According to one study:

“We find little evidence of a gradient in adult fast-food consumption with respect to wealth. While adults in the highest quintile are 54.5% less likely to report fast-food consumption than those in the lowest quintile, adults in the second and third quintiles are no less likely to report fast food–food intake than the poorest. Contrary to popular belief, fast-food consumption rises as income rises from the lowest to middle quintiles.”

Finally, the fact that this is fast food, as opposed to “reasonably quick but still too long for the ever-impatient individual,” is a major factor in the success of YUM stock and its brands. Time is considered a valuable asset, and people who value time over money are happier, according to this study.

To me, as an investor, this information explains why YUM stock and its brands remain successful after decades in business, and despite almost 20 years of Americans becoming health obsessed.

Bottom Line on YUM Stock

Although YUM stock revenues have been relatively flat, after pulling out all the various one-time charges, we find that diluted EPS has been growing at an astonishingly consistent clip of 6%.

Even more consistent is operating and free cash flow, which comes in at about $1.2 billion and $800 million, respectively. Most of that free cash flow is paid as a 1.6% yield.

So while I’m not wild about paying 15x net income for YUM stock at this moment, given a healthy correction in the YUM stock price, I may just make a run for the border.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance, and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.


Article printed from InvestorPlace Media, https://investorplace.com/2017/11/why-yum-brands-inc-is-more-than-a-stock/.

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