John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
At first glance, Starbucks Corp. wouldn't seem to fit the profile of a classic dividend investment.
The stock yields just 1.2 per cent. It trades at a hefty multiple of about 32 times 2015 earnings estimates. And the company has only been paying a dividend since 2010.
Yet, for long-term investors who can tolerate some risk, the world's largest coffee chain has several attractive qualities. I don't own the shares personally or in my Strategy Lab model dividend portfolio, but I would consider initiating a position if the stock has a pullback, particularly if the Canadian dollar strengthens from current levels.
Over the past 10 years, Starbucks has rewarded investors with an annualized total return – including dividends – of nearly 15 per cent (in U.S. dollars), handily beating the S&P 500's total annualized return of about 8.3 per cent. While there are no guarantees such outperformance will continue, Starbucks is on my radar for the following reasons:
There's plenty of expansion ahead
When you see a Starbucks on virtually every corner in North America, it's tempting to think its best growth days are over. Not so. In China, for example, Starbucks operates about 1,400 stores and is opening a new location every day, on average. With about 22,000 stores worldwide, Starbucks is aiming to reach 30,000 within five years.
What's more, the company is squeezing additional revenue out of existing stores by raising prices and expanding its menu offerings: in the second quarter, global same-store sales surged 7 per cent. Distributing its products in grocery stores and expanding into tea provide additional avenues of growth.
The dividend is growing fast
Looking at the yield in isolation doesn't tell the whole story, because Starbucks has been raising its dividend at a much faster rate than most companies. The latest increase, announced in October, was about 23 per cent to 16 cents (U.S.) a quarter from 13 cents. Since Starbucks initiated a dividend in 2010, it has more than tripled its payment (adjusted for a two-for-one stock split in April) and there are almost certainly many more double-digit increases to come. Starbucks is a very shareholder-friendly company: including share repurchases, it returned a record $1.6-billion to investors in fiscal 2014, up 32 per cent from 2013.
Sales and profits are surging
Companies that are growing as quickly as Starbucks never trade at bargain price-to-earnings multiples. Over the past five years, Starbucks' revenue has climbed at an annualized 11 per cent and earnings per share have grown by about 21 per cent. Driven by new store openings and same-store sales growth, Starbucks' earnings will rise by 15 to 20 per cent annually over the next five years, analysts estimate.
"If Starbucks can grow at robust rates for an extended period of time, we believe today's valuation will prove to be cheap," Odlum Brown analyst Stephen Boland said in a note.
The product is addictive
As a coffee drinker myself, I know first-hand about the joys of a caffeine high and the agony of caffeine withdrawal, including headaches, lethargy and irritability. Caffeine addicts will go to great lengths to get their preferred fix, which is why Starbucks – whose brew has a bolder taste and higher caffeine levels than many competitors – can charge premium prices. The coffee's distinctive flavour, combined with inviting stores where people come to relax with friends or discuss business, has made Starbucks a powerful global brand with a huge "moat" that defends against potential challengers to its market-leading position.
The company is embracing mobile technology
During the holiday season, one in seven Americans received a Starbucks gift card, the company said. Total cash loaded onto Starbucks cards during the quarter reached $1.6-billion – up 17 per cent year-over-year. "More important is that we are now seeing large numbers of last holiday's first-time gift receivers become loyal, engaged, repeat Starbucks customers," chairman and CEO Howard Schultz said on the second-quarter conference call in April. Many gift card recipients go on to enroll online in the company's loyalty program and sign up for Starbucks' smartphone payment app, which now has more than 16 million active users.
In a growing number of stores, customers can even use the mobile app to place orders and pay before they arrive at the store, allowing them to pick up their coffee or snack without waiting in line.
Closing thoughts
Keep in mind that stocks with higher-than-average P/E multiples can sell off sharply on any signs of a growth slowdown. For Canadian investors, a rise in the loonie would also negatively affect the value of U.S. stocks when priced in Canadian dollars. If you can live with those risks, Starbucks will – barring some sort of dramatic event – continue to post rising sales, earnings and dividends as it hooks more consumers around the world on its caffeinated beverages.
Remember to do your own due diligence before investing in any security.