Multiple categories equal less risk
We all know diversification helps to spread risk, and that holds true in the fast food business as well. Yum! Brands, Inc. (NYSE:YUM) has done an excellent job of developing a diverse set of offerings through three distinct brands. The brands are KFC, Pizza Hut and Taco Bell, and all three serve very popular food types. Also, as with McDonald’s, they have done an exceptional job of maintaining consistency of product and service across a multi-national business. In China, Yum has done a very good job of building their brand in the fastest growing consumer market in the world. They are also developing new concepts targeted particularly at the Chinese consumers that will aid in future growth.
Yum treats its owners very well. Over the last five years, the dividend has increased at an annualized rate of 22.47%, and the current yield of 1.88% requires a payout rate of only 36%, allowing room for further increases. In addition, the 5-year averages for return on assets and capital are an impressive 15.9% and 21.9%. Considering the global economic conditions during that time makes the results even more impressive.
With a market capitalization approximately 1/3 the size of McDonald’s Corporation (NYSE:MCD) and a successful track record of international expansion, the growth prospects for Yum! Brands, Inc. (NYSE:YUM) are probably superior to those of McDonald’s, making it a compelling opportunity.
The end result
While Burger King Worldwide Inc (NYSE:BKW) has a choppy history and a weak financial foundation, McDonald’s and Yum Brands seem to be poised to continue providing investors with safe, steady returns for many years to come. With projected earnings growth rates around 10% and dividends between 2% and 3%, these two businesses look well positioned to satisfy investors’ appetites for profits, regardless of what you think of the food.
The article Try Fast Food to Satisfy Your Appetite for Profits originally appeared on Fool.com and is written by Ken McGaha.
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