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! Brands, Inc. (NYSE:YUM) 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).
A chef in a kitchen preparing a fast food meal of chicken, pizza and burgers.
Yum! Brands, Inc. (NYSE:YUM)
Number of Hedge Fund Holders: 35
An American multinational fast-food holding company, Yum! Brands, Inc. (NYSE:YUM) ranks third on our list of the best dividend stocks from the restaurant sector. It is one of the biggest players in the fast food industry, with a portfolio that includes top fast food chains like KFC, Pizza Hut, and Taco Bell. The company recently reported its second-quarter 2024 earnings that showed declines in same-store sales for both Pizza Hut and KFC. According to the company’s CEO, the Middle East conflict and a more cost-conscious consumer have posed challenges to same-store sales. Around 200 of Yum’s restaurants are temporarily closed in the Middle East, Malaysia, and Indonesia. However, he noted that sales trends in the U.S. have shown improvement compared to the previous quarter, largely due to value meals like Pizza Hut’s $7 Deal Lovers. The stock surged by 2.65% on August 6, after announcing its quarterly earnings and year-to-date, its returns came in at over 6%.
Taco Bell experienced a 5% increase in same-store sales for the quarter. With most of its locations in the U.S., Taco Bell’s focus on value has helped it navigate the slowdown in consumer spending. The chain saw growth in same-store sales across all income groups. Yum! Brands, Inc. (NYSE:YUM) aims to boost profitability for its Taco Bell division by expanding the use of artificial intelligence in drive-thru lanes. By the end of the year, it plans to implement this technology across hundreds of Taco Bell locations in the U.S.
Yum! Brands, Inc. (NYSE:YUM)’s balance sheet reflects a robust cash position, making it attractive to income investors. As of the latest quarter, it holds $680 million in cash. Over the past twelve months, its operating cash flow reached $1.62 billion, while its levered free cash flow was $1.17 billion. In addition to this, the company has been growing its dividends consistently for the past seven years, which makes it one of the best dividend stocks on our list. It currently pays a quarterly dividend of $0.67 per share and has a dividend yield of 1.96%, as recorded on August 6.
Insider Monkey’s database of Q1 2024 indicated that 35 hedge funds held stakes in Yum! Brands, Inc. (NYSE:YUM), up from 33 in the previous quarter. These stakes are collectively valued at over $584.4 million. With more than 1.4 million shares, Cantillon Capital Management was the company’s leading stakeholder in Q1.
Overall YUM ranks 3rd 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 YUM 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 YUM 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.
