EAT Brinker International Inc

Kentucky-based Yum! Brands Inc. (YUM) recently announced its decision to hike quarterly dividend by 14% from 25 cents paid previously. This equates to an annual payout of $1.14 per share. The increased dividend will be paid on November 4, 2011 to stockholders of record on October 14. This represents the seventh consecutive annual increase in dividend paid by Yum! Brands since its inception in 2004 and brings the forward annual dividend yield as of September 14, 2011 to 2.14%.

The company has a consistent track record of paying quarterly dividends, supported by its cash position. 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 32.8%; a much faster pace than the industry average of 6.3%.

The last dividend hike of 19% to 25 cents was announced in September 2010. Prior to that, Yum! announced a dividend hike of 11% in September 2009 along with an authorization of 300 million share repurchase.

One of Yum! Brands’ peers, Frisch’s Restaurants Inc. (FRS) announced a 6.7% increment in its dividend to 16 cents, early this week. Another peer, Brinker International Inc. (EAT) increased its quarterly dividend by 14% to 16 cents per share in August end.

Yum! Brands’ forward annualized dividend yield surpassed the industry average of 1.48%. However, it lagged forward annualized dividend yields of 3.23% and 2.98% of Frisch’s Restaurants and Brinker, respectively.

Yum! Brands, the world’s largest restaurant company in terms of system restaurants, with more than 38,000 units in over 110 countries, ended the second quarter with cash balance of 955.0 million. During the quarter, Yum! generated free cash flow of $593 million. We believe the company has enough monetary resources to provide optimum shareholder value.

We appreciate Yum! Brands’ concerted efforts to consistently boost long-term shareholder and franchisee value even in times of an economic downturn. We believe this commitment affirms the company’s optimistic outlook and ensures strong future growth. Yum! Brands has stepped up shareholder value through a share buyback program. Shares are repurchased opportunistically as part of Yum! Brands’ capital structure decisions. The company’s dividend and share repurchase programs have returned over $1.9 billion and $6 billion to shareholders, respectively, since 2004.

The company 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 retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.

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