After all the Forex content that I’ve been posting as of late, you might be wondering if I have abandoned dividend investing at this point and completely converted to the dark side. Not so! I am still very much dedicated to growing my dividend snowball all the while dabbling into currency swing trading. So no, I haven’t converted to the dark side; I have converted to the twilight side (lolwut).
So let’s talk about everyone’s favorite coffeehouse: Starbucks! Starbucks is a company whose stock had been on my watchlist for a while now, though it definitely hadn’t been one I had really been thinking about in recent times.
Early in November, a big controversy surrounding Starbuck’s plain red cups exploded when renowned evangelical Christian fucktard Josh Feuerstein made a video about how the company’s lack of inclusion of “wintery symbols” on the cups was an attack on Christianity. This kind of inconceivable stupidity embodies many of the things I loathe about organized
brainwashing religion, but that’s not the point of this post (inb4 people get butt-mangled because I dared take a jab at religion *gasp*).
Anyway, suffice to say that the controversy brought Starbucks back under my radar, so at least I have that to thank Mr. Feuerstein for. After looking over the company’s most recent earnings report, it became clear that I was missing out by not owning some stock in this brilliant business.
On 11/9/2015 I purchased 6 shares of Starbucks at $62.19/share, initiating a position for a total investment of $373.14.
Do I really need to explain why selling coffee makes for a great business? The world literally runs on the caffeinated beverage. Seriously, who the fuck doesn’t drink coffee?? (ironically, I actually don’t drink it, lelz)
Alright, let us now look at the numbers. As always, all the data I use to calculate stuff is pulled from Morningstar.
When looking at a company’s revenue growth, I like to compute the compound annual growth rate over 10-year, 5-year, and 3-year periods. This allows me to see whether or not the business has been growing over time and it also shows me whether the growth has been accelerating or decelerating in recent years. So let’s look at what Starbucks has been up to over the past decade:
Above-10% growth that seems to be accelerating? I’d say that’s pretty darn good for an already well-established business.
EPS growth is another important metric to look at because it will give you a better picture of a company’s financial health. Revenue growth is nice and dandy, but if net income isn’t increasing proportionally, then there’s clearly something wrong going on. So what’s the story with Starbucks?
Well, not only are the figures in line with the revenue growth (upward growth for both), but the EPS growth is actually growing and accelerating at a faster pace than the revenue. Not gonna lie, I really like what I’m seeing here!
The debt-to-equity ratio will tell you if a company has been using a lot of leverage to finance its growth. Acceptable numbers here will vary depending on the industry you’re dealing with, with some sectors like the financials sector being notorious for their high levels of debt.
Starbucks’ debt-to-equity ratio clocked in at a minuscule 0.4 in 2015, well below the industry average of 1.6. Pure awesomesauce.
Interest Coverage Ratio
Another important ratio I like to look at is the interest coverage ratio, which you get by dividing a company’s earnings (before taxes, interest, rainbows, etc.) by its interest expenses. I usually like to see a number above 5 here, preferably even 10, though again this can vary significantly depending on the industry we’re dealing with.
Starbucks’ interest coverage ratio came out at 56.36 in 2015, which is purely and simply delicious. Kinda like its coffee (not that I would know, lolz).
The yield currently floats around 1.3%, which is pretty low by dividend-investing standards. However, the company only started paying a dividend 5 years ago, so there’s that. Furthermore, I view Starbucks as more of a value/dividend stock hybrid, kinda like Apple and Disney for example. I’m not buying the coffeemaker for its current payout, but rather for its future growth and income potential.
Dividend Growth Rate
Dividend growth rate is one of the most important factors to look at as a dividend investor. It’s easy for dividend investors to get caught up in chasing high yields, but dividend growth is just as important (if not more). Now, since Starbucks only started paying a dividend in 2010, I can only compute 5-year and 3-year CAGRs for the DGR. With that said, let’s take a look:
Well, decelerating dividend growth is obviously never something I’m happy to see, but in this case it is hardly alarming.
For one, when a company first starts paying a dividend, they’ll sometimes increase it by huge amounts in the first year or two just to bring it to a reasonable level, and then they’ll taper off the growth from there. This was the case with Starwood Property Trust, for example.
Secondly, it’s not like a 40% DGR is sustainable, lol. Don’t I wish! I’m usually happy with 8-10% DGR for most established businesses, so even at the current rate of 23.5%, I certainly can’t complain.
With a payout ratio of 34.4%, Starbucks has plenty of room to grow its baby dividend well into the future.
I used a DDM (Dividend Discount Model) with a discount rate of 11% and a super conservative dividend growth rate of 9.5% (below 10%, just to be cheeky) to valuate the stock. Using such a strong margin of error, the fair value comes out to $58.40, which means that I purchased the stock at a slight premium.
Meh. Starbucks is one of those growth companies that I truly feel you won’t ever find a “perfect” entry for. While you wait on the sidelines for that perfect price, the stock will keep appreciating at mach speed. After a few years, you’re gonna regret fussing over a few dollars when your return would have been triple-digit, all the while raking in some dividend income as an added bonus.
I’m not gonna be that person, so #yolo.
Long live coffee (even though I find the taste appalling and will likely never drink it), and long live Starbucks (and their perfectly inoffensive red cups).
What’s your opinion of Starbucks? Do you drink coffee or are you some sort of human anomaly like me who somehow can’t stand the taste of the world’s favorite beverage? Feel free to share your thoughts in the comments.
Disclosure: long SBUX