I just discovered the true "capital of coffee." I'm traveling with my wife and two small children in the Pacific Northwest. We're staying in a city called Kirkland, Wash. -- across the lake from Seattle and a few miles west of Microsoft's (MSFT) headquarters in Redmond. Costco (COST) was founded here, and Google (GOOG) has a growing campus. The booming local economy can be seen in the housing market, which I described a couple weeks ago. It can also be seen at the local Starbucks (SBUX) across the street from my hotel.
A fun fact for coffee lovers: Kirkland has more Starbucks locations per capita than Seattle, with 13 locations serving this city of 50,000 people. The Starbucks here is always flooded with customers. I stopped by at 7 a.m. yesterday to pick up breakfast for my family. Five customers were ahead of me in line, but I was still served in less than three minutes. And the place is busy all day long.
My order including one large coffee, a latte, two bagels, three juices, and one breakfast sandwich for a grand total of $20.64. The day before, I ordered a similar room service breakfast from my hotel for $63. I suspect I'm not the only guest opting for Starbucks instead of the continental breakfast. But the Starbucks sensation isn't just a Seattle thing, even though the company was founded here in 1971. Ever since, Starbucks has been growing like a weed. It's a true growth stock success story -- the type of legendary growth that most investors dream about.
Last Friday, Starbucks reported blow-out earnings that sent shares soaring 10% in just a couple days. For a sizable company like Starbucks, that huge move added $5 billion to the market value. The financial results were stellar. Growth was impressive, with sales up 13%. Equally important, the company exceeded the all important analyst expectations for revenues and earnings.
But there is one metric that's coveted in the restaurant business. And that's same-store-sales. Sales at locations that were open more than one year grew by an impressive 8%. That may not sound good. But in the world of restaurants, this is considered outstanding. Consider that other big restaurant chains are having trouble growing at all. McDonald's (MCD) saw same-store sales grow by only 1% in the last quarter. Even one of the fastest growing restaurant chains -- Chipotle Mexican Grill (CMG) -- saw same-store-sales increase just 5.5% in the latest quarter. And at Noodles & Co. (NSLD) -- the billion-dollar noodle shop IPO sensation -- sales grew only 2.2%.
Starbucks stock has been an outstanding performer. Ever since its IPO in 1992 at a split-adjusted $8.50, the stock has consistently performed better than the S&P 500 index. Shares are up 398% over the last five years, compared with 33% gains for the S&P 500. That trend has continued in 2013, with shares of SBUX beating the broader market by two to one.
That outperformance has translated into a premium valuation -- shares trade at 27x earnings (compared with McDonald's P/E ratio of 17). But the company's estimated earnings growth of 20% in 2014 seems to justify the higher valuation. For income investors, Starbucks isn't a dream stock. The dividend yield is just 1.2% today. But since 2010, when the company initiated a dividend, it has been increased by 110%. There is reason to believe that the increase in the dividend will continue, and Starbucks could become one of the biggest dividend growers of the next decade.
However, there is far more to Starbucks than the dividend. And that's the potential for continued capital gains. I've owned Starbucks shares in my account since late 2012. Shares are already up 34%, and I'm considering buying more.
My opinion is that little by little, the world is becoming wealthier. While Europe may still be in the dumps, economies in Asia and the U.S. are growing. As more people around the globe join the ranks of the middle and upper class, there will be growing demand for $400 iPhones and $5 Grande Café lattes from Starbucks. As a result, Starbucks will continue to see superior growth compared to its "fast-food rivals" and the stock should continue to perform handsomely. If you want to bet on growing global prosperity, this stock is one that I recommend and personally own.
Disclosure: I personally own shares of SBUX.