Is Yum! Brands the Right Stock to Retire With?
Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. Let's figure out what makes a great retirement-oriented stock, then examine whether Yum! Brands (NYS: YUM) has what we're looking for.
The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.
Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.
When scrutinizing a stock, retirees should look for:
- Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
- Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
- Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
- Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
- Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.
With those factors in mind, let's take a closer look at Yum! Brands.
What We Want to See
Pass or Fail?
Market cap > $10 billion
Revenue growth > 0% in at least four of five past years
Free cash flow growth > 0% in at least four of past five years
Beta < 0.9
Worst loss in past five years no greater than 20%
Normalized P/E < 18
Current yield > 2%
5-year dividend growth > 10%
Streak of dividend increases >= 10 years
Payout ratio < 75%
7 out of 10
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With seven points, Yum! Brands feeds conservative investors a healthy helping of things they like to see in a stock. Strong growth has allowed the former PepsiCo (NYS: PEP) spinoff to keep sending greater dividends home to shareholders, and although the shares are a bit pricey, they also give you exposure to emerging markets.
In the last few years, there's been a big shift in the way people eat out. When times were good, restaurant chains like Brinker International (NYS: EAT) , Darden Restaurants (NYS: DRI) , and Cheesecake Factory (NAS: CAKE) blossomed to take advantage of the huge numbers of customers hungry for new dining experiences.
But a slow economy has pushed people back toward fast-food options like McDonald's (NYS: MCD) , Chipotle (NYS: CMG) , and Yum!'s Taco Bell, KFC, and Pizza Hut offerings. The combination of inexpensive food and convenience has become more important than ever to those struggling to make ends meet.
In addition, Yum! has staked a big claim in the emerging markets. Not only has it set its sights on opening 20,000 restaurants in China, but it also bought out Chinese chain Little Sheep, dramatically increasing its presence and breadth in the world's most populous nation.
Currently, Yum!'s downside is that you won't find its shares on anyone's discount menu right now. But in addition to having solid dividend growth, the company could be entering a new growth phase, especially if foreign economies stay stronger than the mature U.S. market. For retirees and other conservative investors, Yum! is an interesting combination of an income stock with good growth prospects.
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills, and teach you how to separate the right stocks from the risky ones.
Add Yum! Brands to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.
At the time this article was published If you want to retire rich, you need to be confident that you've got the basics of your investment strategy down pat. See if you're on track by following the "13 Steps to Investing Foolishly."Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Chipotle, Yum! Brands, and PepsiCo. Motley Fool newsletter services have recommended buying shares of Yum! Brands, PepsiCo, McDonald's, and Chipotle, as well as creating an iron condor position in Chipotle and a diagonal call position in PepsiCo. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.
Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.