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Yahoo and Yum

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Dear Mr. Berko:

I know you don’t like Yahoo or Microsoft, but a friend told me that Microsoft will buy Yahoo. Nothing is certain, but do you think Yahoo may be a good speculation? Also, what do you think of Yum Brands? I recently visited China and saw several Pizza Huts and KFC units in two large cities, and they were all busy. I’m 46 – do you think Yum Brands is a stock I could hold for 20 years? If you approve, I’d like to buy 300 shares of Yahoo and 100 of Yum Brands.

N.E., Wilmington, N.C.

Dear N.E.:

Yes, you are right; I don’t like Yahoo Inc. (YHOO-$16.33), though I may be wrong. And yes, you’re right; I do not like Microsoft Corp. (MSFT-$28.69), but again, I may be wrong. Usually, two wrongs don’t make a right, but in this instance, they might. I think there’s a 55 percent to 75 percent degree of probability that MSFT could buy YHOO this year between $21 and $23. So yes, I’d be a speculative YHOO buyer.

However, if Microsoft doesn’t make a second try at Yahoo (it offered $32 in February 2008), there are several private equity pirates such as Kohlberg Kravis Roberts, Blackstone and Silver Lake Partners, each of whom has a takeover strategy in place.

There’s even credible talk that Internet portal AOL Inc. (AOL-$24.15) is considering a move on YHOO. But AOL would need some serious financing help, because its market capitalization is dwarfed by YHOO’s $21 billion cap.

I’m even hearing that Rupert Murdoch’s giant $33 billion revenue News Corp. (NWS-$17.08) has an interest. There may be a bloody feeding frenzy among the omnivorous arbitrageurs.

I like Yum Brands Inc. (YUM-$47.74). This $11 billion revenue company, which split 2 for 1 in 2002 and again in 2007, has had nine consecutive years of double-digit revenue and income growth.

YUM, spun off from PepsiCo in late 1997, owns, operates and franchises 16,000 KFC units with average sales of $965,000 per unit, 12,000 Pizza Huts with $790,000 in average sales per unit and 5,300 Taco Bells with $1.23 million average sales per unit. YUM also owns Long John Silver’s and A&W, and as it continues to add new units every day, YUM will also add new employees (it now employs 352,000) every day to its work force.

YUM is a “go-to” name for investors seeking global growth. About 60 percent of revenues and 60 percent of profits derive from overseas, particularly China, where YUM has been feeding people for 20 years with more than 3,000 units. This is YUM’s most profitable market, and management hopes to have 20,000 Chinese units in the coming dozen years. YUM’s growing revenues, growing earnings and growing presence in China, plus expansion in Russia, India and France, will continue to build the company.

Finally, YUM’s five-year compounded annual dividend growth of 33 percent should warm the cockles of a long-term investor’s heart. The current $1 dividend yields 2 percent. However, if future dividend growth is just half that of past dividend growth, YUM will pay a $22 per share dividend in 2031, when you are 66. That’s $2,200 per year per 100 shares and a 46 percent annual return on your cost basis. So yes, buy YUM, too.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net. ©2011 Creators.com