We recently compiled a list of the 7 Best Restaurant Dividend Stocks to Buy. In this article, we are going to take a look at where Yum China Holdings, Inc. (NYSE:YUMC) stands against the other restaurant dividend stocks.
The restaurant industry is facing challenges this year due to shifting customer preferences. The 2020 pandemic had already prompted a move towards digital solutions, which were initially thought to be a long-term fix. However, the landscape continues to evolve, and now consumers are shifting their preferences again. Customers are being more cautious when dining out, opting for fewer items, cutting back on alcohol, and favoring value-menu options over premium ones. People are now prioritizing grocery shopping over dining at quick-service restaurants due to tighter budgets. As consumers become less inclined to spend extravagantly on eating out, quick-service restaurants are under pressure to maintain performance. To attract budget-conscious diners, brands are likely to increase promotional offers. Overall, same-store sales and customer traffic are declining as high prices and reduced savings take their toll on consumer spending. The Dow Jones U.S. Restaurants & Bars Index is down by nearly 3% this year so far.
High prices aren’t the only issue when it comes to dining out. Food delivery apps have reacted to new wage increase mandates for gig workers by raising their fees. This has led to frustrated customers, a drop in restaurant orders, and a decrease in delivery drivers. A Wall Street Journal report highlights that in cities like Seattle, Uber Eats orders fell by 45% In the first quarter of 2024 compared to the same time last year due to these higher fees. This decline in consumer orders means restaurants have fewer deliveries to make, and drivers have fewer jobs, impacting the entire delivery ecosystem. Experts believe it’s too soon to determine the long-term effects of the wage increase on fast-food restaurants and whether it will result in significant layoffs or closures. Historically, wage hikes haven’t always led to job losses. For instance, a University of California, Berkeley study found that when California and New York raised their minimum wage to $15, nearly doubling the federal rate of $7.25 per hour, job growth continued.
Despite challenges, the restaurant industry isn’t entirely faltering this year. RSM Global reports that, while demand might be softer than expected, retail sales are still growing, driven by increased real income and stronger consumer sentiment. The report further mentioned that in 2024, the restaurant sector is expected to see annual sales growth of 2% to 3%, in line with the inflation rate. To succeed in this competitive environment, businesses need to focus on automation and maintaining robust operating margins for scalability. Integrating smart technology is crucial to meet rising consumer expectations and boost operational efficiency. Retailers and restaurants should strategically invest in these areas to capitalize on growing consumer spending.
Given the optimistic forecast and shifting investment trends, investing in restaurant stocks, particularly those offering dividends, seems like a prudent choice. The consumer discretionary sector, which includes restaurants, saw its annual dividends increase to $106.8 billion in 2023, up from $84.6 billion in 2022, according to a report by Janus Henderson. In this article, we will take a look at some of the best dividend stocks from the restaurant industry.
Our Methodology:
For this article, we sifted through ETFs and screeners to identify dividend-paying companies that operate in the restaurant industry. These companies typically own and operate various types of restaurants, including fast-food chains, casual dining establishments, fine-dining restaurants, and quick-service restaurants. After careful consideration, we selected 10 stocks from this list based on their popularity among hedge fund investors. We then arranged these stocks in ascending order of hedge fund sentiment.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
The iconic yellow and red roof of a franchise restaurant in the bustling streets of a city.
Yum China Holdings, Inc. (NYSE:YUMC)
Number of Hedge Fund Holders: 28
Yum China Holdings, Inc. (NYSE:YUMC) is a Shanghai-based fast-food restaurant holding company that operates and manages several well-known brands. the stock has dropped more than 21% year-to-date, largely due to challenges in China, such as shifting consumer behaviors and increased competition. These factors have affected the company’s performance and investor sentiment even throughout the past year. However, on August 6, YUMC surged by nearly 12%, after reporting better-than-expected earnings in the second quarter of 2024. The company posted revenue of $2.68 billion, which showed a 1% growth from the same period last year. The quarter also remained positive for the company’s expansion efforts. By June 30, 2024, the total number of stores had reached 15,423, with 10,931 KFC locations and 3,504 Pizza Hut outlets. During the quarter, the company added a net total of 401 new stores, of which 99, or 25%, were opened by franchisees.
Baron Funds also highlighted the reasons for Yum China Holdings, Inc. (NYSE:YUMC)’s decline in its Q4 2023 investor letter. Here is what the firm has to say:
“Yum China Holdings, Inc. (NYSE:YUMC) is the master franchisee for the YUM brands in China and operator of the KFC and Pizza Hut restaurant networks in that market. Shares detracted after the company reported a negative surprise on margins for the third quarter and hinted that increased competition and cost-consciousness among Chinese consumers could cause that margin compression to continue through the first quarter of 2024. Although in-year margins are volatile at Yum China, its pristine balance sheet, cumulative investments in technology, unmatched scale, and successful pivot to higher-ROI, smaller footprint stores in recent years should drive continued 8% to 10% store growth at attractive returns. Further, given its strong free-cash-flow generation and strong balance sheet, we believe the company is likely to offer capital returns to shareholders in excess of earnings over the next several years. We remain shareholders.”
Yum China Holdings, Inc. (NYSE:YUMC) is a strong dividend payer with a solid amount of cash available on its balance sheet. Its trailing twelve-month operating cash flow comes in at $1.4 billion and levered free cash flow amounts to over $888 million. As of the end of June 2024, it has over $1 billion available in cash and cash equivalents. Its strong cash position could be seen from its $249 million return to shareholders through dividends and share repurchases. Yum China Holdings, Inc. (NYSE:YUMC) started paying dividends in 2017 and has paid regular dividends to shareholders since then, which makes it one of the best dividend stocks in the restaurant sector. The company pays a quarterly dividend of $0.16 per share for a dividend yield of 1.92%, as of August 6.
The number of hedge funds tracked by Insider Monkey owning stakes in Yum China Holdings, Inc. (NYSE:YUMC) jumped to 28 in Q1 2024, from 22 in the previous quarter. These stakes are valued at roughly $818 million in total. With over 12.2 million shares, GuardCap Asset Management was the company’s leading stakeholder in Q1.
Overall YUMC ranks 5th on our list of the best restaurant dividend stocks to buy. You can visit 7 Best Restaurant Dividend Stocks to Buy to see the other restaurant dividend stocks that are on hedge funds’ radar. While we acknowledge the potential of YUMC as an investment, our conviction lies in the belief that some deeply undervalued dividend stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued dividend stock that is more promising than YUMC but that trades at less than 7 times its earnings and yields nearly 10%, check out our report about the dirt cheap dividend stock.
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Disclosure: None. This article is originally published at Insider Monkey.