Monday, April 28, 2014

Did I Really Buy a Company For 470 Times Earnings?

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?

22 comments:

  1. Good call JC. I love the long term prospects of SBUX and want to it add to my portfolio. Keeping an eye on it....like you said, its a fair valuation at current levels and the huge P/E number due to one-time cost is probably throwing people off with their screeners and filters.

    Best wishes
    R2R

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    1. R2R,

      I really like SBUX for the long-term growth prospects of the company and most importantly to me the dividend. I just wish I had bought during the depths of the financial crisis when it was down in the teens. It's not the best price but it's nowhere near a full position yet so there's still room to add to my position if we can get a pullback in the markets.

      Thanks for stopping by!

      Delete
  2. I think this is a good buy JC. It's been on my radar for some time now and with Loyal3 I have a chance to put small amounts to use. I'll probably be joining you soon as a stockholder of SBUX. The Starbucks just down the street from where I live is constantly packed with customers - women, men, old people, young people and everyone in-between. The general public love this company!

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    1. Gareth,

      I think it was last week when it dipped below $70 and I should have bought then. The company is great and people have to have their SBUX fix even though to me it's pretty darn expensive. Almost all the SBUX locations I ever drive by are always packed. Sometimes it's as simple as seeing people continually shopping somewhere. I just wish I had jumped on this one before now.

      How's Loyal3 going? I'm thinking of starting up and account to DCA into some positions and earn some cash back too.

      Thanks for stopping by!

      Delete
  3. HaHa. I saw the same PE as I was combing through the Loyal3 dividend stocks. This is the reason I don't like using the PE. It can be affected by many variables that don't necessarily affect the business. This is an example of using an Accounting idea for purposes of finance. I much prefer cash flow.

    SBUX is a good purchase. I owned it for several years, but sold it due to the size of the yield. Now that I have a little more XP under my belt if DGI, I think I am going to look for some lower yielding yet high growth stocks. FDO also comes to mind here.

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    1. ILG,

      470 P/E is cheap right? Most of the time one-time charges aren't significant enough to cause disparities like this so I'll use the EPS and P/E as reported. But every now and then you'll find situations like this where there's obviously something out of whack. I also focus more on cash flow while analyzing companies.

      Even though I'm hoping to reach FI relatively quickly the lower yielding/higher growth companies with long-term tailwinds have a place in my portfolio. That's why I own V too and almost added to my position yesterday as well.

      Thanks for stopping by!

      Delete
  4. Pursuit,

    I'll have to give SBUX a serious look here soon. Agreed that it's not cheap no matter how you slice it, but if it does appear reasonably priced factoring in the expected growth.

    Best wishes!

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    1. DM,

      It's a GARP stock for sure because it's not cheap on just about any metric. But I think there's a huge tailwind for the company and there's a lot of growth opportunities with Teavana, expansion of food offerings, wine/alcohol, mobile payments, and of course there's still the core coffee business. I think there might be some more short term weakness but that's fine by me.

      Thanks for stopping by!

      Delete
  5. Trailing twelve month p/e is often misleading, you're on to something! Ttm p/e is a quick metric plastered all over every finance site, but includes all kinds of one time events (both positive and negative) that will not affect a business moving forward. Using ttm p/e means I would have to scour earnings reports for about ~70 companies to figure out extraordinary events. No thanks. I decided to save myself some time and just use the forward p/e. Forward p/e isn't perfect, but only requires one additional click on my part.

    Best wishes with your SBUX investment, hope it continues to grow!

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    Replies
    1. CI,

      You mean they aren't going to grow almost 1,800% in one year? I prefer forward P/E to TTM P/E for the same reason. There's not those one-time charges baked into the forward looking P/E. Although I really prefer looking as cash flow because it's less susceptible to accounting trickery.

      Thanks for stopping by!

      Delete
  6. JC,

    Really like this pick! Starbucks in LA is always packed with long lines. On special occasions I treat myself to a soy chai tea latte with 2 shots of espresso. I suggest you buy one with the first dividend to celebrate. You can for sure look forward to lots of growth from here.

    Keep marching toward those goals, you're getting closer.

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    1. Ryan,

      I think SBUX just about everywhere is packed with long lines. I'm not sure if they are still open but at one point in downtown Houston there were two SBUX stores open across the street from each other, and they both had lines. That's a good sign. I'm not a fan of coffee/tea but I might buy my wife one with the first payment which I'll get to receive since they go ex-div on 5/6 I think.

      Thanks for stopping by!

      Delete
  7. JC, Most of my DGI stocks are low yielding growth stocks with double digit dividend raises such as SBUX, MA, TROW, UNP, GWW, NKE....so I obviously agree with owning Starbucks. Good stucff as usual.

    Regards,

    Joe

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    1. J.A.,

      Another one that I want to own is DIS, that company is a beast. I wouldn't mind getting MA to go with my V position and UNP has been on my radar as well.

      Thanks for stopping by!

      Delete
  8. Nice shock title. I'm wonder how many people will skim the relevant info and miss the point :O

    ReplyDelete
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    1. WE,

      I know a 470 P/E seems to go against a value/DG strategy but this is definitely a special situation.

      Thanks for stopping by!

      Delete
  9. I had no idea that they were considering selling alcohol in their stores. I'm not sure how that'll pan out, but mobile payments could be a huge boon.

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    1. DBF,

      It's a whole other set of issues but from what I've read it's going to just be select stores where there's already a night crowd. My wife much prefers to use the mobile payment when she goes to SBUX and I think more and more people will start that shift. If SBUX truly can expand into providing support or running mobile payments platforms for other companies that'll be huge.

      Thanks for stopping by!

      Delete
  10. I'm still kicking myself for buying Starbucks in the '08/'09 time frame and selling after a $5 move to about $15/share. This was well before I was a DG or buy and hold investor. You live and you learn. I am at Starbucks at least 3-4 times per week for espresso or breakfast sandwiches. They make a good product!

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    1. You and me both!!!! I'm anxiously waiting for the next crash JC so I can get in on what I consider Trophy Assets!

      Delete
    2. AAI,

      Well, at least you're funding my dividend payments now. So it's not a total loss. That was a pretty interesting time to be investing and based on the time frame it was probably completely justified. Even though I try to ignore the financial media it's hard to escape it when every place you turn the global economy is going to collapse. Live and learn and I've made my fair share. As long as you learn from it then I consider it just a great lesson.

      Thanks for stopping by!

      Delete
    3. Marvin,

      I'd love to get my own wall of trophies in my office at the house! I'm definitely looking to add to this position as well as plenty of others. Of course the problem I'm going to face is buying to early on the way down and not blowing through my capital too early.

      Thanks for stopping by!

      Delete