Sometimes, you go into a week expecting to do one thing … and then stuff happens, so you decide to do something else.
Such was the case when making my first November stock selection for DTA’s Income Builder Portfolio.
With the market again hitting all-time highs, I went in thinking, “Defense, defense, defense. Maybe a utility or a consumer staples company.”
Then Starbucks (SBUX) had yet another outstanding earnings report AND raised its dividend by 14%, causing me to tell myself:
“Self, if you are gonna choose a stock that is relatively richly valued — as most utilities and consumer staples are — you might as well build up an existing position in a company that is still growing significantly, even if it’s not in a defensive sector.”
So come Friday, Nov. 1, I will execute a purchase order on Daily Trade Alert’s behalf for about $1,000 worth of the iconic purveyor of all things coffee.
(starbucks.com)
Growing More Than Beans
I like companies that continue to grow in all ways, and Starbucks certainly is one of those.
Value Line regularly features a list of 100 “Highest Growth Stocks” — which takes into account sales, cash flow, earnings, dividends and book value — and SBUX is almost always on the list.
Indeed, Starbucks is one of only 11 companies on the list that gets Value Line’s highest “Safety” score (as indicated by the red circle above).
Since we bought SBUX back in June 2018, it has had one expectations-beating earnings report after another … and the latest, on Wednesday, Oct. 30, was no different.
Among the highlights of the fourth-quarter and full-year 2019 presentation: significant year-over-year comparable-store sales growth, both in the U.S. and abroad (red-circled area below); and outstanding full-year revenue and earnings growth (blue).
(starbucks.com)
Even some of the figures I did not choose to highlight are pretty darn impressive, including: 5% full-year comparable sales growth; 600+ new stores opened in Q4; and 15% increase in Starbucks Rewards members.
The following slide from the company’s presentation provides a look at how SBUX achieved its full-year 17% growth in earnings per share.
Here is Morningstar Investment Research Center’s quickie, post-earnings take on Starbucks:
Two takeaways stand out to us from Starbucks’ fourth-quarter update. One, customer experience, menu innovation, and digital initiatives continue to solidify Starbucks’ wide moat — evidenced by 6% comps in the U.S. (3% ticket, 3% transaction) and 5% in China (3% ticket, 2% transaction) — position it for sustainable growth. Two, management’s initial 2020 guidance — global comps of 3%-4%, 2,000 net new Starbucks locations (6%-7% implied unit growth), revenue growth of 6%-8%, operating income growth of 8%-10%, and adjusted EPS of $3.00-$3.05 — strikes us as achievable but also allows for potential upside. … We view Starbucks as one of the more dynamic growth and income stories in what could be a volatile 2020 for restaurant stocks.
As a result, Morningstar’s analysts expect to make “a modest increase” to their $90 fair value estimate. In other words, even though Starbucks has a lofty 30 P/E ratio, the analysts don’t think it’s crazy overvalued. (I will discuss this topic thoroughly in my post-buy article.)
More Than Tea In China
When I explained why I chose SBUX last year, I mentioned the company’s plans to become an ever bigger part of the Chinese coffee-drinking experience.
Starbucks’ first store in China opened nearly 20 years ago. (starbucks.com)
Sixteen months later, I am even more excited about this development.
The company’s partnership with Alibaba (BABA), China’s mobile commerce giant, recently celebrated its one-year anniversary, leading Starbucks CEO Kevin Johnson to say this during the earnings call:
“I’m pleased to share that we surpassed our goal of expanding Starbucks Delivers to 3,000 stores in 100 cities by the end of the fiscal year.
This propelled mobile order sales mix in China to 10% in the fourth quarter with seven points coming from Starbucks Delivers and three points from our recently launched mobile order for pickup.”
In addition, SBUX opened more than 600 stores in China in fiscal 2019, raising the total there to 4,000-plus.
“As we expand our store footprint, we have also been investing in innovative retail formats,” Johnson said, “including our Starbucks Now store in Beijing that opened in July — a unique, express retail experience, that seamlessly integrates physical and digital touch points, to enhance the Mobile Order & Pay, and the Starbucks Delivers customer experience.”
And Speaking Of Shareholder Benefits …
In concert with its latest earnings report, Starbucks announced it was raising its quarterly dividend to 41 cents/share (from .36).
This actually was a relatively modest increase for the company, which had been lifting its payout to shareholders by more than 20% per year.
(schwab.com)
Still, I have never complained about a 14% dividend hike, and I’m not about to start now.
It marks the 10th consecutive annual increase for Starbucks, and pushes the yield up to about 2%.
Wrapping Things Up
There are 28 companies in the Income Builder Portfolio, and Starbucks will be the 17th that we will have bought on multiple occasions since launching the project in January 2018.
Yes, I seriously considered other names for this purchase. With SBUX continuing to perform at a high level, however, this seemed a good time to take another sip of this blue-chip business.
My next article, to be published Saturday, Nov. 2, will focus primarily on valuation.
As always, this is not a recommendation for any stock; investors are strongly urged to conduct their own due diligence.
— Mike Nadel
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