Starbucks Stock: Frothy, With Extra Large Growth (SBUX)


I just realized that I am reinvesting my dividends in Starbucks (SBUX). To be specific, my 1.18% yield, which is about $96 per year for my 150 shares, is not being reinvested into SBUX stock, but into Starbucks directly. I am there often enough that my dividends are fed back into the business.

Starbucks Stock: Frothy, With Extra Large Growth (SBUX)I suppose I should just put it back into SBUX stock, but I never liked buying fractional shares. It’s too difficult to keep track of.

Still, investing in SBUX stock is a pretty smart move if you have a long-term diversified portfolio and are looking for growth stocks.

The way I see things, Starbucks stock is going to become one of those stocks that I will eventually consider a “forever hold.”

The brand is now so dominant on a global scale, and has so revolutionized American habits, that a horrible catastrophe would have to befall SBUX for me to consider otherwise.

Starbucks Is Still a Growth Stock

Think about the days before Starbucks was even around. Where did you meet someone, whether it was a planned meeting or an impromptu get-together? You might meet at an office or a restaurant. Whether it was a business meeting or a social one, there was no neutral territory.

Now look at what’s happened. Starbucks has become the default meeting location, especially for impromptu meetings. “There’s a Starbucks at Fourth and Grand,” we might say. That’s all SBUX was designed as — a meeting place. The coffee was an afterthought. Why not sell something? How about something addictive?

That alone was a stroke of genius. Execution was another matter. And while the company had endured some growing pains, Starbucks stock eventually soared as the kinks were worked out and the concept expanded globally.

That alone would have been good enough for most companies. However, SBUX has continued to expand its brand. Its repertoire of coffee has expanded to include tea, soda and blended drinks. It has added pastries and sandwiches and snacks. It moved into grocery stores with its coffee and added ice cream. Starbucks just keeps growing and innovating, and there is nothing that stands in its way at this point. It can just keep adding to its menu.

Howard Schultz has not abandoned his stake, either, as many CEOs might have done at this point. He has 32.5 million shares worth over $1.5 billion. While that “only” accounts for a little over 2% of the company, in absolute dollar terms, that’s a lot. So his interests are aligned with shareholders.

Starbucks stock now has $2.9 billion of cash on hand plus investments, and $2.34 billion in debt. It generated $2.27 billion in free cash flow over the trailing twelve months. As restaurant-style investments go, it’s profit margins are 14.6%, far above what most restaurants manage. It has an incredible return on equity of 49%.

I like growth at a reasonable price stocks – getting growth stocks at or near a PEG ratio of 1.0. I’m not opposed to paying for a great growth stock, though. Even though I bought Starbucks stock at lower prices, I would consider adding here at $54.

Fiscal Year 2015 estimates are $1.58. Earnings are growing at a 20% clip, so the starting point for fair value for a GARP stock would be $31.16. Then I add 10% each for having a world class brand name, a great balance sheet and great free cash flow. Thus, just as a GARP stock, I would be willing to pay 26 times earnings, or $41.

But this isn’t a GARP stock. It’s a growth stock, and I would pay up to a PEG ratio of 2.0 for a great growth stock, or up to $60.

As of this writing, Lawrence Meyers was long SBUX.

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