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Kentucky-based Yum! Brands Inc. (YUM - Analyst Report) recently announced its decision to hike its quarterly dividend by 18% from 28.5 cents paid previously. This equates to an annual payout of $1.34 per share. The increased dividend will be paid on November 2, 2012 to stockholders of record on October 12. This represents the eighth successive annual increase in dividend paid by Yum! Brands since its inception in 2004 and brings the forward annual dividend yield to 1.95% as of September 21, 2012.

Yum! Brands, the parent company of Pizza Hut, KFC and Taco Bell has a consistent track record of paying quarterly dividends, supported by its cash position.  The last dividend hike of 14% to 28.5 cents was announced in September 2011. Prior to this, the company had raised its dividend by 19% in September 2010.

The dividend policy continues to target a payout ratio of 35–40% of the annual net income. During the last five-year period, Yum! Brands’ dividend has grown at a rate of 19.86%; a much faster pace than the industry average of 5.03%.

One of Yum! Brands’ peers, McDonald's Inc. (MCD - Analyst Report) announced a 10% hike in its dividend to 77 cents, on the same day of Yum!’s announcement. Another peer, Brinker International Inc. (EAT - Analyst Report) increased its quarterly dividend by 25% to 20 cents per share in August end.

Yum! Brands’ forward annualized dividend yield surpassed the industry average of 1.26%. Over the last five years, its quarterly dividend has increased more than twice. However, the company’s forward annualized dividend yield lagged the forward annualized dividend yields of McDonald’s (3.29%) and Brinker (2.27%).

Yum! Brands, the world’s largest restaurant company in terms of system restaurants, with more than 38,000 units in over 120 countries, ended the second quarter of 2012 with cash balance of 984.0 million. We believe, the company has enough monetary resources to provide optimum shareholders’ value.

We appreciate Yum! Brands’ concerted efforts to consistently boost long-term shareholder and franchisee value irrespective of the economic peaks and valleys. We believe that this commitment affirms the company’s optimistic outlook and ensures strong future growth. The company has stepped up shareholders’ value through a share buyback program also. Shares are repurchased opportunistically as part of Yum! Brands’ capital structure decisions. Since 2004 till June 16, 2012, the company’s dividend and share repurchase programs have boosted returns to shareholders by over $2.4 billion and $7.0 billion, respectively.

Yum! Brands has one of the highest returns on invested capital in the Quick Service Restaurants industry. The company has increased its dividend each year since the initiation of the program in 2004. Each annual increase has been at a double-digit percentage rate.

Yum! currently carries a Zacks #4 Rank, which translates into a short-term Sell rating. We are also maintaining our long-term ‘Neutral’ recommendation on the stock.
 

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