Back when I was in college, in the mid-1970s, the Dow Jones Industrial Average was filled with, well, industrials. The only retailers on the list were scaled department stores like Sears and Woolworth’s. Today when investors look for blue-chip stocks they look to companies like Starbucks (NASDAQ:SBUX). How did SBUX stock become a mainstay? Or will your kids think of it 40 years from now the way I think of Sears?
What makes a stock a blue chip is long-term value, like DJIA mainstays AT&T (NYSE:T), General Electric (NYSE:GE), General Motors (NYSE:GM) and General Foods (NYSE:GIS).
Starbucks has that. The share price is up 93% over the last five years. The dividend has more than doubled. It’s now at 45 cents a share. If you bought 100 shares back then at around $60, a year after its most-recent stock split, you have an effective dividend yield of 3% and a total annual gain of 21%.
Starbucks has managed its executive transition from legendary founder CEO Howard Schultz to former Microsoft (NASDAQ:MSFT) executive Kevin Johnson.
The coffee purveyor is now renowned for its technology. This has improved its service to the blind. It has transformed its drive-thru system. It’s even made it a player in Bitcoin through VPC Impact Acquisition Holdings (NASDAQ:VIH), which is taking the Bakkt cryptocard public on the New York Stock Exchange.
Starbucks is still a coffee chain, of course. It’s staying on top of trends with cold press espresso and a “secret menu” of iced drinks. Sales should get a jolt from stimulus payments and the economy reopening. Starbucks is still strong in China, so much so that Beijing reached out to Schultz to help repair ties.
Is SBUX Stock Overvalued?
With annual sales peaking at $26 billion in 2019, and its market cap now 5 times those sales at $130 billion, Starbucks is a value stock, not a growth name. It’s also an expensive name, hitting an all-time high on March 16. Starbucks now sells for almost 200x last year’s earnings. Another stock split may give the shares a small boost, but that’s all.
“[The] recovery path that we’ve been on for the last few quarters, it has not been linear, week to week or month to month, but sequentially quarter to quarter we’ve continued to recover our business,” Johnson told Yahoo Finance.
Why then are analysts still pounding the table for it? More than half still have the buy lamp lit.
Cowen & Co. is among those who upgraded it lately, on hopes vaccines will crush the pandemic. Shares bounced back quickly after the pandemic hit. Earnings for the December quarter, with China growth almost compensating for lower results elsewhere, are leading to upgrades. Several analysts, including at Wells Fargo (NYSE:WFC), have tagged Starbucks as a top consumer name for 2021.
The Bottom Line
My problem is that a lot of this good news is already baked into Starbucks’ stock price. Zack’s has a rating of “hold” on SBUX stock even though they expect earnings to double.
Starbucks has done extremely well despite numerous failures. It has tried to expand into tea several times and walked back from that. It tried extending its hours into the night with beer and wine sales, then walked that back. If you buy Starbucks beans or capsules in a store, those beans are coming from Nestle (OTCMKTS:NSRGY), under an agreement signed in 2018.
If you have a 10-year time horizon on your stock purchases, as you should, you can ignore Starbucks’ current valuation and buy it. But SBUX stock is not a trade, especially at these levels. Keep it on your buy list, wait for the next dip, then make your move and relax.
At the time of publication, Dana Blankenhorn directly owned shares in T and MSFT.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack https://danafblankenhorn.substack.com/.
