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
I’m not buying the dip but I think it makes sense. People aren’t going to stop drinking coffee and starbucks is the most convenient way to get it. The question is whether they can continue growing and I think China is key for that.
TITM,
Right- The China growth will be interesting and something I did not cover too much in my article. Doing a quick search online, the growth is happening there, but time will tell if it is as successful as some of their stores here.
Bert
I recently commentd on another blog (forgot which one, sorry!) that I’m still doubtful on this company. The outlook so far with growth in China (tradewar looming) and there is a vastly different culture in the US compared to China so in essence thay need to change a culture to provide long term growth which represents a big challenge.
Second doubt is how recession proof this is, when a next recession hits I’m guessing that the first thing people drop is their latte-frappe-moccacino-fresco-iced sprinkled with bacon fluffed up with cinnamon and with a curly-straw-on-top-coffee? Or maybe thats just my neocortex talking and not my limbic brain.
Who knows? With this dip even I’m more interested in this company (but still not buying), so in any case the best of luck with this investment Bert!
Mr. Robot,
Thank you for the comment. I understand where the growth concerns are coming from, but as I mentioned in the last comment, I’m still confident in some China growth despite the current political situation. But hey, I can understand why some investors may be put off by the growth prospects going forward and would rather opt to not invest in the company.
I may disagree with the the recession proofness of the company. Sure, they have a lot of fancy expensive drinks. And those should be the first to go if your budget is tight and you are looking for ways to save. Heck, I would strongly endorse people saving $3/cup of coffee and just purchasing black coffee. But inside of it all, SBUX still has an arsenal of cheaper coffee drinks, teas, and other products that are not quite as expensive. Plus, their brand loyalty in the US (at least from the people I see that drink there religiously) is strong. So I think they can make it through a recession and survived the test of the Mortgage crisis in 2008.
Thanks for the great comment! I hope I am this optimistic in a few months haha
Bert
Bought some yesterday not as much though. Did 2 buys But smaller nice to get my feet wet with a new trading company and free trades lol.
I like it Doug, especially all those free trades haha which brokerage are you using now?
Merrill Edge made the switch. Finally got it to go through. reaped the benefits now. LOL
Hi Bert,
Good buy from you. congreatulations
I add 5 shares in my account , it is a new position
Lets see how the dividend work out the next 10 years.
Willem
Thanks Willem! Congrats to you as well and nice purchase! Looking forward to looking back, laughing, and collecting some nice dividend checks over the next ten years
Hi Bert,
SBUX looks very attractive, congrats on the purchase. I may add some myself. Hopefully before it hits $50 again.
Happy dividend hunting
Dividend Pursuit
Dividend Pursuit,
Thank you very much. I am loving this price and was happy to get additional shares at an even $50. I may be okay now with my overall position, but if it falls still, I may add some more.
Bert
Hi Bert,
Congrats on your purchase! – owning 81 shares of this coffee giant is great. I really like Starbucks at these levels. I think that the short term issues pushed the price down, but i think that SBUX will reward the shareholders in the long term. This is a cash machine and you are right, i see a lot of Starbucks Coffee shops here in Germany too. SBUX is definitely on my “buying” list.
Wish i had more cash at hand.
Best Regards,
DividendSolutions
I’m bullish on SBUX as well. While growth has maybe slowed somewhat from the breakneck pace it was on a few years ago, the cash flow is still growing and management is clearly on board with returning a good chunk of that to shareholders.
I believe this recent share price weakness represents a good buying opportunity.
Great pick up, Bert.
Catfish,
Thank you very much. I”m glad you are feeling some optimism like me. They are still growing stores internationally as well, despite some closures in the US. In the long run, I think the company will be just fine and we will enjoy some nice dividend increases along the way 🙂
Bert
Great post Bert!
My trigger finger is getting reeeaal itchy with Starbucks at 15 times earnings. I currently hold 75 shares of this coffee powerhouse and would love to use this opportunity to even it out to a nice 100.
Soon and very soon….
Have a great 4th of July!
Tall Investing,,
Here is my question….what is holding you back? What is your target price for adding shares of SBUX? I’ll have a great 4th of July, thanks! IT is actually my birthday, so what isn’t there to love about this??
Bert
nice Bert
soo many buying starbucks these days. Maybe its the Canadian in me but i prefer tim hortons.
starbucks is busy on this side of the border too though!
great boost to the dividend though.
keep on stacking
cheers.
PCI,
There SBUX train is starting to grow. The company hasn’t been at this price level in a long time. So that, plus the dividend and buyback boost, has most people salivating haha
Bert
The items you mention Bert have created sort of a perfect storm for DG investors. SBUX has been popular in the community recently as you know for these very reasons. I’m sitting this one out for a couple reasons. Just being a little extra cautious with my capital these days. Also, I don’t own SBUX currently and I’m not to hot on adding a new stock unless I am going to sell one. Need to keep my number of holdings manageable. Good luck with the purchase. Tom
Tom,
Those are two great reasons to stay out in my book. If you are preserving capital or are being cautious, there are plenty of better opportunities out there that offer higher dividend yields without some of the questions that SBUX has to work through. Which companies are on top of your watch list if you don’t mind me asking?
BErt
I recently added SBUX to my portfolio, and in hindsight maybe jumped in a little too early as I bought 20 @ $51.85/share. However, even at that price I was still confident in the long-term view despite the risks. Based on that, I definitely like your purchase. I’ve contemplated adding a little more at these prices, but have other positions I am trying to balance out as well–which was my plan before adding SBUX as well, but I just couldn’t pass it up as it was getting beat down.
Nice one Bert! I keep on buying SBUX too… Total bought 3 times in June… and just bought again yesterday! Oops… 🙂 We should well be rewarded in the future. Cheers!
Wow Steps! 3 times….that’s amazing! How many shares have you added since June haha I’m looking forward to riding this train with you for many years to come 🙂
Bert
Actually my bad – added not 3 times but 2 times in June for a total of 40 shares in June.
Had added once in May (10 shares). Just added yesterday 20 more shares.
So total added up to now since April is 70 shares….
in my mind I am set with my SBUX position for now. If the price goes even more down I will be on the fence to buy again or pass / let re-invested dividends work on it 🙂
Great purchase Bert. I am one of Starbucks’ addicted customers. I get nothing but the Frappuccinos when I go and I visit the store virtually every day. Sad, but true. In looking at the Dividend Diplomats Stock Screener, I realize that I gave great weight to number three on that list regarding the company’s dividend history for my investment into Starbucks, as most companies in my portfolio are Dividend Aristocrats. Coming from a regular customer, I think that Starbucks is going to be around for years to come and the investment into it for the long haul was a good move. I just wish I had additional capital to take advantage of the dip.
Thanks Dividend Portfolio! There will be time for you to capitalize on this investment opportunity (hopefully)! The loyalty at SBUX is just great, as you know haha Thanks for sharing your story here.
Bert
Great purchase, I’ve seen many investors from our community pick up some shares. I wish I could do the same. Solid company and future aristocrat in my honest opinion. I’m long 40 shares myself, congratulations on your extra 40 shares!
DI
DI,
Thank you very much! It is definitely popular and I have not seen these prices for quite some time. I hope you are right about them being a future aristocrat 🙂
Bert
Nice buy. SBUX is a popular one in the divi community right now. i don’t own any, but I sure drink a lot. You’re Welcome! I hope all is well with you guys.
hanks for supporting their bottom line for all of us in the community Nathan 🙂
Bert
Bert,
SBUX is on my super short list right now too. Nice move!
– Gremlin
I like the buy, Bert! I think SBUX is looking attractive at these levels. I wish I had more capital right now, but I can only sit back and watch for now =(.