Starbucks Coffee (SBUX) Or A Lifetime Of Passive Income?

By: ispeculatornew
Date posted: 11.11.2011 (5:00 am) | Write a Comment  (0 Comments)

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Starbucks has become a symbol of premium coffee around the world thanks to an atmosphere, a brand, a premium service and above all coffee that is considered by a large number of coffee lovers as the “best way you could possibly start your day”. All of those things are true and that has helped Starbucks grow from one small Seattle based shop to a worldwide empire that continues to grow. Terrific business no matter how you look at it. Chances are that everyone reading this has purchased Starbucks coffee in the recent past.

Have You Ever Asked Yourself The True Cost Of Your Premium Coffee?

No, I don’t mean the actual cost of making that coffee (which we all know is insignificant ($0.25 per cup?) but rather what you are giving up in order to buy that hot, tasty cup of coffee.  You’re not learning much when I tell you that there is a big markup on that coffee’s price and I would certainly not advocate stopping to buy it entirely.

An Idea For Those That Go To Starbucks Daily

I’ve already written about putting your our expenses back in context and I thought it would be interesting to look at the numbers. Given that Starbucks shares currently trade at $45 or so, let’s imagine that you managed to save that amount every month in order to buy 1 share of the company. What would that mean? Let’s start off by looking at the dividend profile using the 20 top things that we look for in dividend stocks.

Dividend Metrics

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Starbucks (SBUX) clearly does not have a long history of paying dividends which is not very surprising considering how recent the company is. The company has been and continues to be focused on growth so dividends was not a priority. That has now been changing and I think it’s safe to assume that it will remain so as long as the underlying business continues to do well.

Company Metrics

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Few companies have been able to build such strong fundamentals in so little time with sales and earnings growing at a very rapid pace and no debt to speak of. The only number that makes me pause is the P/E ratio that does imply the company is fairly expensive these days. Those are mostly caused by the strong growth and I would personally not worry about it too much from a dividend perspective.

Stock Metrics

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Industry Metrics

While the coffee/restaurant business is very competitive, Starbucks has been able to build an extremely strong brand that is now very known all around the world. You might think that the shops all already all over and that is the case in many places but believe me there are still millions of places around the world just asking for a Starbucks to be built. The explosion of the middle class in emerging economies will also certainly create incredible opportunities for Starbucks.

Sustainability And Fit

While Starbucks has not had a long history of paying dividends, I do still think that it remains a very safe pick and company to own and while its current dividend yield remains quite expensive, that is likely to change over the next decade as the dividend continues to increase and SBUX could turn out to be a great pick for a sustainable dividend portfolio.

Back To The Cost Of That Coffee

Let’s imagine that every month you managed to skip some of those delicious Starbucks coffees in order to buy 1 share. I will assume that the dividend will increase by 8% yearly for 10 years and 4% after that.

After 1 year, you would have 12 shares and that earn you a decent $9 per year. Not bad right? That increases to $173 in 10 years and $830 per year in 25 years.  It might not sound much but I’m not even talking about dropping Starbucks all together, this is just about

Important: The stock price is likely to increase significantly over time which will impact the number of shares that you can buy every year (bad for dividend income) but also result in significant capital gains (good for dividend income) and dividend growth is likely to be higher than expected but this is a good estimate in my opinion.

Disclaimer: No holdings on SBUX

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