This morning I initiated a new position in Starbucks (SBUX) by purchasing 28 shares for $70.51 each. Based on the TTM earnings per share of $0.15, that's a whopping 470 P/E ratio. While I think Starbucks still has a lot of room left to grow, I don't think a 470 P/E ratio is all that cheap. Of course if you go back to their quarter ending September 2013 you'll notice a loss of $1.64 per share that was related to an arbitration between Starbucks and Kraft Foods. Backing out that one time charge due to the arbitration closing and earnings per share for FY 2013 change from $0.01 to $2.26. Starbucks announced Q2 results last week and the growth continued to come with a Q2 record $0.56 per share in earnings, which was a 17% improvement from Q2 2013. Global comp store revenue growth of 6% helped lead to record Q2 revenue of $3.9B.
I'm not going to say that Starbucks is all that cheap here but given it's expected growth, it's at a reasonable valuation. FY 2014 earnings estimates call for $2.67 and FY 2015 earnings estimates are calling for $3.17. That's a 2014 P/E of 26.41 and 2015 P/E of 22.24. This was more of a chance to purchase GARP, growth at a reasonable price, as the PEG ratio is around 1.39.
Starbucks has a lot on their plate and plenty of drivers for growth. Besides continued growth in their core coffee business, the expansion of the Teavana franchise and additional food items to their menu should continue to spur on growth for the company and in turn for shareholders. Not only that but Starbucks has been testing out selling wine/alcohol at select locations in concentrated areas of night entertainment. The expansion into wine/alcohol does bring on a whole other set of issues, but I think it can provide continued growth at the bulk of Starbucks' sales come early in the morning and in the afternoon even though stores are open until late at night. By selling wine/alcohol they can keep stores open at the hours they already do but should be able to drive more sales as alcoholic beverages are more conducive to night time consumption than coffee. How many people want a caffeine fix at 9 pm at night as opposed to a little bit of alcohol to help them unwind?
Starbucks continues to grow their mobile payments platform and while it's concentrated just for their own stores currently, there's been hints of expansion to providing expertise and even running the payments programs for other companies. I can speak from experience that my wife prefers to use her handy mobile app to pay for her Starbucks fix because it's easier and quicker. Overall I just plain believe in the story of Starbucks and most importantly the Founder/Chairman/CEO, Howard Shultz.
I mentioned above that I purchased 28 shares of Starbucks for $70.51 per share. After commission my per share cost basis came to $70.79. Based on the current quarterly dividend of $0.26 per share my YOC for these shares is 1.47% and I can expect to receive $29.12 in dividends over the next twelve months before any future increases, which Starbucks should announce in October for payment in November. I'll be looking for opportunities to average down my cost basis, and who knows maybe we'll get some "sell in May and go away" pressure to give us all some better valuations.
Starbucks first initiated a dividend back in March 2010 at $0.10 per share and has increased the payment every year since, giving them a 4 year streak. The current quarterly dividend is $0.26 per share and the latest increase was 23.8%. I think that every dividend growth portfolio has a place for the a wide variety of dividend growth stocks. I want the majority of my holdings to be in the so-called sweet spot (3% yield, 7-10% growth) but there's also places for high yield (>5% yield, 2-5% growth) and low yield (<2% yield, 15%+growth). Starbucks clearly falls in the low yield/high growth category and I expect the growth to continue for the foreseeable future.
My forward 12-month dividends are now at $4,280.73 which is 85.61% of the way towards my goal of $5,000 by the end of 2014.
I've updated my Portfolio page to reflect this purchase.
What do you think about Starbucks as a dividend growth investment? Do you own any low yield/high growth companies?