Why the Yum Brands Stock Price Is Up 5% After Spin-Off News (NYSE: YUM)

The Yum Brands stock price surged 5% to $75.22 today (Tuesday) after announcing it will spin off its China operations.

Yum! Brands Inc. (NYSE: YUM) will split into two publicly traded companies: Yum! China and Yum! Brands.

Yum Brands stockYum! China will become a franchisee of Yum! Brands in Mainland China. It will have exclusive rights to three brands: KFC, Pizza Hut, and Taco Bell. Taco Bell is not yet in China, but Yum believes in the chain's potential there.

The Yum spin-off comes amid the company's attempts to revive its China operations after series of food scandals tainted the company's reputation since 2014. One of the scandals involved a Yum supplier that was using expired meat.

Today's Yum spin-off announcement came just days after CEO Greg Creed told analysts the company would take "immediate action" to turn around its KFC and Pizza Hut brands in China.

Yum named activist investor Keith Meister to the company's board of directors last week, a good sign the Yum spin-off was coming. Meister, a managing partner of Corvex Management, holds a 5% stake in Yum. He's also been one the most outspoken advocates of spinning off the China business.

The split will allow Yum Brands to focus on rebooting its stagnant U.S. business. The company will also focus more on expanding in emerging markets like India.

Additionally, it will provide shareholders with a steady stream of income from royalties while also allowing Yum to take lease obligations off its balance sheet.

Meister says the spin-off could add $16 a share to the Yum Brands stock price. He also said it could boost the company's value by $7 billion. The spin-off is expected to be completed by the end of 2016.

Here's why the Yum spin-off will be such a big deal for Yum Brands stock moving forward...

China: Potential or Problem for Yum Brands Stock?

Yum operates roughly 4,900 KFCs in more than 1,000 Chinese cities. It also runs more than 1,400 Pizza Hut restaurants, nearly 300 Pizza Hut home delivery outlets, and a Chinese chain called Little Sheep.

Cumulatively, 6,900 of Yum's 41,000 worldwide restaurants are in China.

According to Yum, the new China company will take advantage of growth opportunities in the world's second-largest economy. Yum China is expected to have no significant debt and substantial financial capacity to invest in its business.

Creed said the China operations are "self-sufficient and scalable." The China business contributed 57% to Yum's total revenue and 54% to its operating profit in its latest quarter

Still, the company will have to deal with the Asian nation's slowing economy. Monday, China reported its slowest GDP growth rate since 2009 at 6.9%.

Nonetheless, the company aims to eventually grow its China operations to 20,000 restaurants.

Yum said it will discuss more about its China strategy at a scheduled investors' day conference on Dec. 8.

Tuesday's rise put Yum Brands stock into positive territory for the year. At $74.50, shares are up 2.3% year to date.

Stay informed on what's going on in the markets by following us on Twitter @moneymorning.

The Global Wealth Gap Is Now Alarmingly Wide: The top 0.7% of people in the world now control more than 45% of the entire world's wealth. But it's not just the lower class that's suffering. The global middle class is controlling less and less wealth every year...

Related Articles: