Higher Chinese Wages – Even for Fry Cooks -- Raise Questions About YUM’s Lofty Valuation

Be it constructing iPhones or manning the deep fryers at YUM! Brands’ (YUM) KFC, the leading U.S. fast food chain in China, a tight labor market is leading to increased wages and slimmer margins.

The Chinese love their fried chicken, and thus KFC same-store sales in China jumped 19% last year. Overall, global sales for YUM rose just 7% last year. Investors dig all that overseas revenue:

YUM! Brands Stock Chart by YCharts

China's operating profit growth is eclipsing the rest of the company, rising 15% to almost $1 billion last year versus a 9% gain for the other main international division of the company and a slide of 0.7% in its U.S. division.

But restaurant margins in China dropped 2.4% last year. The culprit? Rising wages.

The company said wages in China jumped 20% for the year, cutting the margin to 19.7% from 22.1%. In its earnings release, YUM! was mum on whether higher wages are expected to continue or even gain momentum.

While estimates for China's overall economic growth rate for 2012 have been cut to around 8%, the government has taken action to ensure its economic engine continues strong. That has the potential to keep producing higher-priced fry cooks.

Given the situation in China, are YUM shares really worth such a premium over those of McDonald's (MCD), the far-better-run company?

YUM! Brands PE Ratio Chart by YCharts

Over time, the two chains mirror each other on revenue growth.

YUM! Brands Revenue Growth Chart by YCharts

But McDonald's margins are far superior:

YUM! Brands Profit Margin Chart by YCharts

And the dividend yield at YUM is mere leftovers compared to McDonald's.

YUM! Brands Dividend Yield Chart by YCharts

Michael McHugh is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings, stock screener and portfolio strategies.