Investing in high quality companies now will almost certainly be rewarded over the longer term; one such stock is Starbucks (SBUX), which I am adding to our recommended list, suggests Shawn Allen, contributing editor at Internet Wealth Builder.
We are all familiar with Starbucks, which now has 34,630 locations. Half the stores are company-operated, and half are run by licensed operators. About half of the stores are in the USA and Canada. Starbucks also has a very large presence in China and Japan, all company operated. The company rarely does one-off franchise style licenses, instead licensees operate many stores.
Starbucks has announced that it will close its operations in Russia. But it only operated 130 stores there. In April 2022 founder Howard Schultz returned as temporary CEO after the retirement of Kevin Johnson, who had been CEO for five years. Schultz pledges to address the problems with dissatisfaction among employees, including unionization movements.
The store count has been increasing fairly rapidly in China and other international markets. In the latest quarterly report, Starbucks said rewards members in the US increased 17% versus the prior year. In early May, the company announced it will develop a much-enhanced digital Starbucks community that will include collectible Non-Fungible Tokens (NFTs).
The recent trend is not representative due to the decline with the pandemic and then a strong recovery. Revenues per share were up 18% in the latest quarter despite a decline in China. Earnings per share were down 5%, mainly due to inflation factors. The quarterly dividend is $0.49 ($1.96 per year) for a yield of 2.6%.
The price to book value ratio is not meaningful because the company has paid out all of its equity in dividends and share buy backs. This demonstrates the financial strength of the company. The p/e ratio is somewhat unattractively high at 23 but this is at the lower end of its range. The dividend yield is moderately attractive at 2.6%.
There are risks; in addition to the unionization drives, there is the potential for consumers to cut back on Starbucks purchases as they deal with inflation. But historically people have not given up this “affordable luxury” to any great extent during downturns.
Starbucks is almost certain to remain a global brand powerhouse and to grow over the years. But earnings growth may be modest or negative in the next year as Howard Schultz plans to reinvest in employee wages and benefits.
In the current quarter (Q3 2022), the lockdowns in China will be a significant negative factor. And there will be a write-off to reflect the closing of the 130 stores in Russia, while paying the employees for an additional six months. There is also the potential risk for consumers to cut back on Starbucks purchases as they deal with inflation. But historically people have not given up this “affordable luxury” to any great extent during downturns.
Starbucks is a very high-quality company that has encountered some recent headwinds. It’s likely to be doing better a year from now. A reasonable approach would be to take a half position and revisit the stock in the fall.