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Why Yum! Brands stocks could deliver a 16%-plus return in 2014

Xun Yao Chen

Retirement picks: 4 restaurant stocks with dividends (Part 5 of 9)

(Continued from Part 4)

Can Yum sustain its momentum?

Certain factors, such as the Avian flu and poorly managed supply chain system in China, had negatively affected Yum! Brands Inc. (YUM)’s earnings lately. But these are likely just temporary set-backs. As its food supply chain improves in China, the possibility of a wide-reaching outbreak diminishes. If bird flu does create a catastrophic impact on society, then investors might want to forget about investment for a while and mind their health. As always, it’s a good idea to diversify into other good companies, and investors looking for diversification can use the Consumer Discretionary Select Sector SPDR ETF (XLY).

Strong performance with the US market turning around

While Yum’s US division has performed negatively in the past, it looks like it has been turning around and has somewhat stabilized, with operating income growing from $589 in 2011 to $666 million in 2012. Other segments continue to show strength, with positive growth despite weakness in economic activity or economic growth.

Economic growth could be strengthening worldwide

As economic growth—from Europe to China to other emerging markets—appears to be strengthening lately, it will just be a matter of time until more people flock into KFC stores. I must say, Yum’s KFC brand is really geared towards locals in China. Their product is hot, spicy, and crispy. You can eat a whole bucket of that chicken non-stop and in one go. As for their Pizza Hut line, I wasn’t too impressed, but let’s see how it performs.

Historic dividend growth likely to maintain

Based on this possible upward momentum, Yum’s earnings and dividends will likely continue to grow at a rate of 14% over the next few years, which is higher than McDonald’s Corp. (MCD). Does Yum merit higher growth? Most likely, since the company represents only a third of McDonald’s (MCD), which makes it possible for the company to grow faster. And Yum particularly focuses on emerging markets.

Yum! could give a nice ~16% return to investors

So, using the same method we employed for McDonald’s, assuming dividend yield is going to keep constant and dividend growth will maintain for the next few years, Yum’s dividends should generate 2.05% in dividend returns for investors and a possible share price appreciation of 14%+, which results in a total of 16% plus return for investors. Will it reach 30%, 40%, or 50%? No, but it’s not quite risky.

Now let’s take a look at Darden Restaurants Inc. (DRI) and Brinker International Inc. (EAT).

Continue to Part 6

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