The month of June was coming to a close and I was looking for another investment opportunity. For the second half of the month, I had one of the most publicized companies on my watch list. The company’s stock price had began to fall. Having added to my position earlier in the year at a higher price, I was instantly excited for the opportunity to add to this coffee giant. Here is why I added to my position in Starbucks (SBUX) in June!
Starbucks (SBUX) – the earnings release and the dividend increase
SBUX suddenly popped on my radar again once the company filed their earnings release on June 19th. I’m sure most of you know where I am going with this. Because immediately following the press release, the pundits that were dissecting the filing were out in full force. Before I review the details and analysis by outsiders, I wanted to cover the part that was exciting for a dividend growth investor. In this press release, the company announced a 20% increase in their quarterly dividend, from $.30/share to $.36/share. A heck of an increase that as a shareholder, I was very pumped to receive! And on top of that, the company announced an increase $10b increase in their current share buyback program. They are now eligible to purchase up to $26b of the company’s stock. Both of these moves will generate some nice value and returns for shareholders.
Sure, while there were a lot of positives in the earnings release. In addition with the dividend increase, the share buyback, the was other great news. For example, Starbucks Rewards membership continues to increase, the company announced new efficiency and cost-cutting programs, and the company continues to improve its digital footprint. However, there were some noteworthy items that caused the company’s stock price to decrease.
Reading other articles, the key takeaway was the slowing of growth in the company. The company’s sales growth was below their estimates and the company slightly reduced their EPS guidance for the remainder of the year. The Frappachino, SBUX’s golden child, experienced poor sales during the quarter as well. When looking at the income statement, an investor will see growth in the dollars listed for sales, stores, income, etc. However, over the years, SBUX has relied on their growth to continue moving the company forward. Thus, when growth was sluggish during the quarter, the sellers came out in full force.
Personally, while there may be some turbulence in the short-term, I am long on the company’s long-term growth prospects. Every time I drive by a SBUX store, the line is long and the drive-thru is wrapped around the store. Further, the $8b retail distribution deal with Nestle will help expand the SBUX brand and access new customers. I understand the concerns, and they are warranted. But the slowing of growth and the negative news was not enough to stop me from proceeding with my analysis of SBUX.
the dividend diplomats’ stock screener – sbux
After I saw the earnings release, the dividend increase announcement, the additional share buyback program, and the subsequent tumble of their stock price, I knew I wanted to invest more in the company. However, it wouldn’t be an investment purchase without running the investment through the infamous Dividend Diplomats’ Stock Screener. For this analysis, I will use my purchase price of $50.00/share, and annual dividend of $1.44/share, and a forward EPS figure of $3.32 per share, the low end of management’s GAAP EPS guidance per their recent earnings release. Here are the results
- Price to Earnings Ratio Less than the S&P 500 – The S&P 500 typically has a P/E ratio in the mid-20X earnings. At the time of my purchase, SBUX had a ratio of 15X earnings. SBUX passes this metric with flying colors.
- Dividend Payout Ratio < 60% – We typically use a 60% threshold when reviewing a company’s payout ratio. We believe this percentage point allows a company to continue to grow their dividend going forward without sacrificing the safety of their dividend. SBUX’s dividend payout ratio of 43% is well below our threshold. Once again, SBUX passes this metric.
- History of Increasing Dividends – I already discussed how SBUX increased their dividend by 20%, which is freaking amazing. Typically, I look for companies that are Dividend Aristocrats or have long streaks of increasing their quarterly dividend. But I also understand that this can’t always be a reality. I also know that SBUX is new to the dividend paying game, as they paid their first dividend in 2010. SBUX has actually increased their dividend each year since this date. Therefore, I am content with the shorter streak as management has demonstrated their desire to continue to increase their dividend.
- 5-Year Average Dividend Yield – I like using five-year average dividend as a quick valuation metric. If the company’s yield is above their 5-year average yield, it could potentially indicate that the company is undervalued. SBUX’s yield at the time of purchase was 2.88%, which exceeded their 5-year average yield of 1.5%!
sbux – the purchase
The results of our stock screener were great and SBUX passed all the metrics listed above. Ultimately, despite some of the news in their earnings release, I became confident in the long-term growth prospects of the company and was ready to dive in and make a purchase.
At the end of June, I added 40 shares of Starbucks (SBUX) to my current position. This purchase added $57.60 in forward dividend income. Now, I own 81.2456 shares of the company and will receive $116.99 in annual dividend income from them. I am pretty content with my current position in the company. Barring the price continuing to fall, I will set my sights on building other positions or establishing a new position in my portfolio.
What are your thoughts about Starbucks right now? Are you buying this dip? Or are you less optimistic about the long-term success of the company than me? Are you excited about their dividend increase as well?
Bert