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Is Starbucks Still Awake to Shareholders’ Needs?

December 19, 2018

Starbucks (SBUX) is more than just a spot to get a cup of coffee. For shareholders, the company has delivered an astonishing 1,425.17% return over the past 10 years. That’s over 5.5 times what the S&P 500 managed. And it even tops the cult-followed Apple (AAPL) shares for the same 10 years.

And for this tumultuous year, Starbucks delivered with a return to date of 16.32%—perhaps enough traders and investors needed an extra cup of coffee to stay focused on how to salvage something for the year.

But what justifies buying and owning Starbucks stock? After all, the stock is priced to the moon and the stars, as it is valued at a whopping 73.15 times its book value after disposing its packaged goods business to Nestle (NSRGY). However, at a more modest 3.7 times its trailing sales, Starbucks looks a little more grounded.

The key, of course, is growth. Starbucks has been a stock to own for growth, as it doesn’t pay as much in dividends as it could if it were just a cash cow coffeehouse company. The dividend is 36 cents a share, and while it is up some 25.71% in its distribution over the past year, that only equates to a yield of 2.21%. And with a payout ratio of a mere 39.00%, the company is keeping a lot of that cash for itself rather that for shareholders.

That shows on its books: The company has a whopping 2.2 current ratio of cash and cash equivalents against current short-term liabilities and a mere 39.10% debt to its assets, meaning that this is a very under-levered company for a growth name.

But it keeps pushing for more. While there are nearly 30,000 stores around the world, there are still more coming. About half are owned by the company, with the rest under contract. And while there is arguably a saturation in the US market, in China, where coffee is challenging tea for market share, the company is pushing to get to 6,000 stores over the next four years.

Plus, as more and more folks are spending money on “experiences” rather than items to consume, Starbucks is moving to roll out more of its large roaster stores, which come across as a sort of brewpub for coffee fans, around the world.

And if experience isn’t what customers want, then there’s the speed and convenience through its new push with Uber and Alibaba (BABA) to deliver coffee right to your home or office. In the US alone, the company is geared to have 2,000 of its stores equipped for delivery in short order.

And then there’s that Nestle deal. While it took a chuck of assets off the books in the packaged coffee business, it does set up a recurring revenue stream that should be on the ascent as Nestle is now proving itself to be one of the consumer goods companies that is getting it when it comes to delivering to evolving consumer tastes. And it also takes a lot of operating expenses off of the books for Starbucks in the process, improving margins.

And margins it has. The company has operating margin running at 15.70%. And this is now making for another whopper of a number, with a return on equity of 136.50%. And given its capital-light structure, the return on capital is 46.50%.

The key is sales to keep the stock from just simmering. And at 10.62% on a year over year basis for the most recent quarter, that’s impressive for a company in the consumer space.

The one area that the company falls on a cold cup of joe is the food part of its store business. The food items in the stores are terrible. Soggy, bland and microwaved is not what customers want—but they still pay up for what is worse than for most airline cuisine. If the company could figure out how to deliver better food, then it would be off to further growth.

But that said, the company and its stock work. And in this time of market mayhem, the stock and its coffee are still what investors and customers want and need.