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Yum! Brands Board OKs Spinoff Plan, Ups Dividend by 11%

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Yum! Brands, Inc. (YUM - Free Report) is moving full steam ahead with its plans of spinning off the China business into an independent, publicly-traded company.

The company’s board of directors has given its approval regarding the spin-off, which remains on track to close on Oct 31, 2016.  Meanwhile, Yum China Holdings is expected to begin trading as an independent company, starting Nov 1, 2016 on the New York Stock Exchange (NYSE), under the ticker symbol “YUMC.”

Notably, Yum! Brands board has approved a distribution of one share of Yum China common stock for each share of Yum! Brand’s common stock held, as of Oct 19, 2016, the record date for the distribution. Also, the spinoff is planned as a tax-free distribution to shareholders.

Yum! Brands – Post Split

Post separation, each of the two companies – Yum! Brands and Yum China – is expected to return about 15% per year to shareholders through earnings growth and dividends.

The company added that it plans to return about $6.2 billion to shareholders, excluding dividends, between the date of announcement of the separation (Oct 20, 2015) and the completion of the split.

Post separation, Yum China will hold exclusive rights to the KFC, Pizza Hut and Taco Bell brands in China, and will also have the provision to add new brands. The company will be able to triple its unit count in the long term, and with almost no debt and substantial free cash flow, it is expected to deliver strong growth.

Meanwhile, the new Yum! Brands is likely to be 96% franchised by the end of 2017. The company will have provision to triple its unit count in the long term with strong growth from the emerging markets. Also, it will receive a license fee of 3% of the sales generated in China through KFC, Pizza Hut and Taco Bell.  The company will, however, not get any fees initially for new units opened in China.

Dividend Hike

Yum! Brands board has approved a nearly 11% increase in the company’s quarterly cash dividend to 51 cents per share from 46 cents. On an annualized basis, the dividend payment amounts to $2.04, up from $1.84. The raised dividend is payable on Nov 4, 2016, to shareholders of record at the close of business, as on Oct 19, 2016.

Notably, since initiating a dividend in 2004, Yum! Brands has been annually increasing its dividend at a double-digit percentage rate. We believe that the dividend hike reflects the company’s strong cash position and solid balance sheet and should bolster investor confidence in the company’s financials.

Since the announcement of the separation of its China business, Yum! Brands has repurchased roughly $5.1 billion of its shares and plans to buy back an added $1.1 billion of its stock before the end of 2016, to achieve its previously disclosed plan to return $6.2 billion of capital to shareholders.

Bottom Line

Yum! Brands has been performing relatively well in the domestic and many key international markets. In second-quarter 2016, management raised its profit outlook – for the second time this year – mainly encouraged by strong first-half results and the current profitability trends in China.

Meanwhile, the China division posted flat comps in the second quarter after recording positive comps in the last three quarters, suggesting that a complete recovery will take more time. We believe, going forward, the spin-off would certainly help this Zacks Rank #4 (Sell) company to turn around the division in a more effective way.

Other Stocks to Consider

Better-ranked stocks in this sector include Denny's Corporation (DENN - Free Report) , Wingstop Inc. (WING - Free Report) and Papa John's International Inc. (PZZA - Free Report) . All the three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Denny's 2016 earnings moved up nearly 2% over the last 60 days. Further, for full-year 2016, EPS is expected to grow a solid 20.2%.

The Zacks Consensus Estimate for Papa John's 2016 earnings climbed 1.7% over the last 60 days. The company’s earnings have surpassed the Zacks Consensus Estimate in all of the last four quarters, with an average beat of 7.81%.

Wingstop’s earnings have surpassed the Zacks Consensus Estimate in all of the last four quarters, with an average beat of 15.46%. Further, for full-year 2016, EPS is expected to grow 17.6%.

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