KKR Getting a Good Price for Stake in Yum! Brands’ China Division

Supposedly Yum! Brands (YUM) and KKR are in talks to sell a 19.9% stake in Yum! China to KKR.

(Reuters) – Yum Brands Inc (YUM.N), the owner of the KFC and Pizza Hut chains, is in talks with private equity company KKR & Co LP (KKR.N) and others about a possible sale of a 19.9 percent stake in its China business, CNBC reported, citing Dow Jones.

The stake values the China business at about $10 billion, the report said.

We valued Yum! China using current depressed operating margins at $8-10 billion (with rounding). We think KKR is getting a great price for Yum! China.

If Yum! China’s operating margins and sales return to pre-food crisis levels combined with continued store openings we think in 5 years Yum! China could be worth $15-17 billion. Yum! China could be worth a lot more as they start opening Taco Bells in China too and further improve current stores’ efficiencies.

Reviewing Our Sell Decisions

We sell positions based on a few main reasons.

  1. We expect low or no dividend growth going forward.
  2. The dividend is cut or has the potential to be cut.
  3. The company is drastically overvalued.
  4. We see a better opportunity to invest in.

I think it’s worthwhile to review positions that we’ve sold because of the reasons above. It’s a little check on our methodology.

The table below is every position we’ve sold that was not bought out by another company. I’ve compared the stock to the S&P 500 from the date it was sold just on price return. I know I should factor in dividends but I’m lazy and this is just the start of the review process. The S&P 500 price is from the close on  March 16, 2016, and the price of each stock was taken during the trading day of March 17, 2016 (I told you I was lazy).

The column on the far right is the price return of each stock versus the S&P 500. Anything in red underperformed the S&P 500.

Click image to enlarge.
Click image to enlarge.

The final tally is below. Losers are positions that underperformed the S&P 500 after we sold them. Winners are the positions that outperformed the S&P 500 after we sold them. In retrospect, the labels should be flipped based on our actions.

Click image to enlarge.

Called Away

At the initiation of our dividend growth strategy, we used covered calls to generate extra return. A few of the positions we sold were a result of being called away from us even though we didn’t have a compeling reason to sell them. These positions tended to be the winners.

  • Raytheon (RTN)
  • Eli Lilly (LLY)
  • McGraw Hill Financial (MHFI)
  • Lockheed Martin (LMT)

A couple of positions that were called away from us were positions that we were going to sell. These actually worked out pretty well as they underperformed the S&P 500.

  • AT&T (T)
  • Target (TGT)
  • Automatic Data Processing (ADP)

We used covered calls at the beginning because we had a handful of accounts in our Dividend Growth strategy. It was easier to monitor the open option positions and trade around our positions back then. As the number of accounts in our Dividend Growth strategy grew, using options became more cumbersome, as evidenced above.

Dividend Cutters

We sold a handful of positions because we thought they could cut their dividend. We sold one position that actually did cut its dividend while we held it. The ones that we thought could cut their dividend when we sold them were:

  • Exelon (EXC)
  • ConocoPhillips (COP)
  • Chevron (CVX)

So far we made the right decision in selling these positions based on price returns versus the S&P 500. But they were also good decisions because ConocoPhillips (COP) and Exelon both cut their dividends after we sold them. With Chevron, we think a dividend cut is less likely but we don’t think it will be able to grow its dividend.

We have one lone company that cut its dividend while we held it.

  • Wynn Resorts (WYNN)

Selling Wynn after the dividend cut has so far proved to be the right decision. Wynn has underperformed the S&P 500 since we sold it. The decision to buy and hold onto Wynn Resorts is a whole different story.

Better Opportunities

These are the companies we sold because we saw better investment opportunities.

  • Phillips 66 (PSX)
  • Energy Transfer Partners (ETP)
  • Abbot Labs (ABT)
  • Sysco (SYY)
  • Intel Corp. (INTC)
  • Mondelez (MDLZ)
  • Bank of New York
  • Molson Coors (TAP)
  • Science Applications (SAIC)
  • Leidos (LDOS)
  • Navient (NAVI)
  • SLM Corp. (SLM)
  • Teva Pharmaceuticals (TEVA)

7 positions went on to outperform the S&P 500 with Phillips 66 (PSX) being the largest outperformer. 6 positions underperformed the S&P 500. The underperformers averaged -31% and the outperformers average 37%. If you back out Phillips 66 then the outperformers average drops to 19%.

In hindsight selling Phillips 66 (PSX) was a mistake but at the time it was a very small position. We received it in the spin-off from ConocoPhillips (COP) and we weren’t planning on adding to the position so we sold it.

The true test of this category is comparing what we bought to what we sold.


What hurt us the most was being called away on positions we weren’t planning on selling. The second error was not buying those positions right back. If we eliminated these unforced errors then our selling record would be in much better shape. We’ve stopped using covered calls so that error has been eliminated.

Selling positions because of a potential dividend cut or an actual dividend cut so far has been the right move. Our strategy is dividend growth. If we don’t think dividend growth is going to happen then we need to sell the position.

Selling because of a better opportunity is a mixed bag based on comparison to the S&P 500. The real test will be to compare what we sold to what we bought. Next time…

The Dividend Stocks of the Ultimate Stock Pickers

Morningstar is out with their lists of the highest-yielding and widely-held dividend paying stocks of their Ultimate Stock Pickers.

The top ten highest yielding owned by Morningstar’s Ultimate Stock Pickers.

Table courtesy of Morningstar. Click image to enlarge.
Table courtesy of Morningstar. Click image to enlarge.

And the most widely held dividend paying stocks by Morningstar’s Ultimate Stock Pickers.

Table courtesy of Morningstar. Click image to enlarge.
Table courtesy of Morningstar. Click image to enlarge.


4 Dividend-Payers From the Ultimate Stock-Pickers (Morningstar)

China Makes a Run for The Border

As we mentioned in the 26th volume of our dividend letter, Yum! Brands (YUM) would eventually start opening Taco Bells up in China. The first one will open up this year.

Yum Brands Inc, the owner of the KFC and Pizza Hut chains, said it will open its first Taco Bell restaurant in China by the end of 2016.

The first outlet of the Mexican food chain would open in Shanghai, Chief Executive Greg Creed said at a consumer and retail conference in New York on Tuesday.


Yum Brands to open its first Taco Bell outlet in China this year (Reuters)

A Month is a Year on Wall Street

Apple isn’t the only company that Wall Street does this with but it is one the largest and most widely followed so it stands out.

One of the biggest errors we have as investors is a timing mismatch. We want things to happen now but we forget that these are very large companies and it takes time, multiple years, to implement strategies and generate returns on recent capital investments.

It’s the old metaphor a speed boat versus a super tanker. We think the companies can move like a speed boat but they really move like Super Tankers.

Buying and selling companies based on the emotional pendulum of Wall Street is a recipe for disaster. You have to train yourself to think in years not months.