Yum Brands Charts Out China Overhaul; S&P Cuts Bonds To Junk In Response To $6.2B Dividend Plan

Yum Brands, the owner of KFC, Pizza Hut and Taco Bell, is set to modernize its restaurants and improve operations globally and unveiled a plan to return about $6.2 billion to shareholders before the company splits its China business. The company announced in October that it would separate into two publicly traded companies -- Yum! Brands and Yum! China -- by the end of 2016.

In response to the announcement, Standard & Poor’s Ratings Services, lowered its rating of Yum! Brands bonds three levels to BB Thursday -- also known as junk bonds -- and warned that the fast-food giant’s dividend plan and share buybacks would require taking on higher debt. A company press release after the fast food giant’s annual investor conference in Texas announced that the company would return the $6.2 billion to shareholders in form of share buybacks and special dividends before the China unit split is complete.

“The downgrade primarily reflects our expectation of the company’s meaningfully higher leverage as it executes on its newly communicated financial policy,” Helena Song, an analyst at S&P, said in a statement.

Yum Brands CEO Greg Creed also said that two businesses -- after the China split -- will potentially deliver annual shareholder return of 15 percent, including dividend yield and earnings per share. The previous target for the unified company was 10 percent annual growth in earnings per share.

Yum! was reportedly under pressure from investors in the past year, who said the China division could be better operated separately. The China business reportedly accounts for about 54 percent of the parent-company’s business.

The China division, it’s most lucrative market, has lost some of its sheen as menu changes and health concerns failed to bring customers back. Sales flagged after an avian flu outbreak in 2012, and reports this past summer that one of the company’s Chinese suppliers was selling expired meat to the restaurants.

In 2015, the company’s sales have lagged globally as well with Pizza Hut sales flat in the first nine months. Pizza Hut Chief Executive David Gibbs admitted that the brand had lost sight of delivering pizza faster and would now focus on speeding up delivery time -- a sentiment echoed by KFC head Roger Eaton, who said the fried-chicken chain plans to expand delivery, mobile order-and-pay options and loyalty programs.

Company executives also announced that the China division will be domiciled in the U.S. initially and may have a dual listing in China at some point later. The company’s stock was down marginally on the New York Stock Exchange Thursday.