Yum! Brands deserves attention as potential long-term purchase

You may not recognize the Yum! Brands (NYSE: YUM) company, until you learn that it encompasses the KFC, Taco Bell and Pizza Hut brands and sports over 40,000 eateries in more than 125 countries and territories. Those names are global leaders in their categories, but the company ran into trouble in China last year due to difficulties with some of its poultry suppliers. It appears to be poised to rebound now.

Yum! recently reported its first-quarter results, with revenue rising 5 percent over year-ago levels and earnings per share surging 24 percent. The news on the domestic front wasn’t great, with U.S. operating profits falling, but Yum! seems to be recovering in the key market of China, where it’s positioned for growth and materially outperforming major competitors.

The company is expanding in the populous nation of India, too, where the middle-income consumer is on the rise, demand for American brands is high, and there’s much growth potential. To further fuel domestic growth, Taco Bell has launched a breakfast menu and is testing a whole new restaurant chain, the more upscale U.S. Taco Co.

With a recent price-to-earnings (P/E) ratio of 31, the stock may not be a screaming bargain. But it does offer a dividend near 2 percent, which has nearly doubled over the past five years. Long-term investors might consider buying now or waiting for a dip.

Ask the Fool

Q: I see that Apple is splitting its stock 7-to-1. Does that mean it is time to buy? – C.D., Denver

A: Stock splits are not very meaningful. In this case, for every share of Apple stock a shareholder owns, she will end up with seven. So 100 shares will turn into 700. That seems like one would suddenly be much richer, but at the same time that the shares increase in number, they decrease in price proportionately. Thus, there’s little real difference for the shareholder. (In a simpler example, with a 2-for-1 split, 100 shares of a $40 stock would become 200 shares of a $20 stock, worth $400 before and after.)

Apple’s shares did surge when the split was announced, but the company also reported strong quarterly results at the same time, along with an increase in its dividend and stock repurchase plans. What the split really accomplishes is getting its stock price (recently near $570) down to a more inviting level for would-be buyers.

It also makes Apple more likely to be included among the 30 stocks in the Dow Jones industrial average. Since the Dow is stock-price-weighted, high-priced stocks exert extra influence.

Q: What is a company’s payout ratio? – P.L., Memphis, Tenn.

A: It’s the percentage of a company’s earnings represented by its dividend. Ford Motor Co., for example, pays out $0.50 per share annually, and its trailing 12 months of earnings total $1.76 per share. Divide the former by the latter and you get a 28 percent payout ratio, meaning 28 percent of Ford’s earnings go to its dividend. Very high payout ratios can flag unsustainable dividends.

My dumbest investment

Some time ago, I got tired of stuffing mattresses in this low-yield world and began to invest in earnest outside of my retirement funds. I wanted to test the waters of stock investing and decided to become a dividend investor. Unfortunately, I fell prey to chasing high dividend yields, such as that of Pitney Bowes, which had a yield above 8 percent at the time. I later ignored the signs of declining revenue and erosion of the physical mail business. I even bought more shares as the stock fell.

My lessons learned: (1) Chasing the highest dividend yields is bad for your (financial) health. And (2), not all high-yielding stocks need be avoided … just make sure you understand and believe in their long-term business models. – W.S., online

The Fool responds: The growth of electronic communications has dealt a blow to the king of postage meters. Pitney Bowes has other businesses, though, and a chance at long-term success. Its stock has gained ground over the past five years. Still, tough times led it to slash its dividend in half last year, and it recently yielded 3 percent.