Yum! Brands Splits; Both Companies Have Supersized Goals

Yum! Brands (YUM) will finally be split into two companies on Tuesday, but there will be little time to celebrate as executives at the new fast-food companies must deliver on several huge goals. 

In a move initially announced last year, Yum! China will become an independent company when a spinoff is completed on Nov. 1 via a listing on the New York Stock Exchange. The new spinoff's shares will trade under the ticker YUMC.

Yum! China will hold exclusive rights to use the KFC, Pizza Hut and Taco Bell brands in China, with the opportunity to add or launch new brands in China on its own. Yum! China will pay Yum! Brands a license fee of 3% of its sales at KFC, Pizza Hut and Taco Bell in China.

Over time, Yum! China expects to have more than 20,000 restaurants in operation, up from about 7,000 today. For 2016, Yum! China is expected to haul in $8 billion in sales, up from $4.7 billion generated so far this year. Operating profit is pegged at $1.1 billion for the year, an increase from $751 million for the year up to Sept. 3, 2016. The business's total restaurant count is expected to be 7,500 at the end of the year. And, importantly, the China outfit will have zero debt on the books at the time it becomes a public company, freeing it up to aggressively roll out new stores or even acquire other chains, pay out dividends or buy back stock.

As for Yum! Brands, it foresees some meaty profits in the years ahead after this operational overhaul.

Yum! Brands expects earnings of $3.75 a share by 2019, up from about $2.92 a share in 2015. Analysts expect Yum! Brands to earn roughly $3.70 a share in 2016.

Yum! Brands' bottom line is expected to be boosted by several measures. The first is the separation of its China unit, which will help raise cash for share repurchases.

Second, Yum! Brands plans to return $13.5 billion to shareholders from the fourth quarter of 2015 through 2019 in the form of dividends and stock repurchases. So far, Yum! Brands has repurchased about $5.5 billion of its stock since its capital return program was launched last year.

Third, Yum! Brands expects to have about 98% of its restaurants under a franchise model by the end of 2018, up from 93% in 2016. By selling off thousands of restaurants, Yum! Brands will shed costs and expenses, which will prop up earnings per share. In turn, the lower cost base and increased free cash flow coming into the business may put the chain in the position of making acquisitions to boost growth.

"Each company will have more growth with much less risk," Yum! Brands CFO David Gibbs told TheStreet earlier this month. Gibbs added, "There are no imminent plans for an acquisition, but we have acquired chains in the past that we have re-branded into some of our brands." 

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