Why Starbucks' Stock Could Soon Hit Record Levels

| About: Starbucks Corporation (SBUX)

Summary

Even though the North American market growth has slowed, there is still potential for increased profitability.

Starbucks' expansion into international markets, especially China, will be the main driver of growth going forward.

Stockholders are constantly rewarded from stock buybacks and steady dividends.

By Michael Vodicka

For American companies, China is a lot like the Holy Grail. With a population of 1.4 billion, more than three times the size of the United States, making a big splash with Chinese consumers is a quick way to pump up the bottom line.

But while China offers great opportunity, winning in this far away land requires great skill and experience. Many top-shelf companies have tried and failed.

Transportation heavyweight Uber is one recent example. Uber swept across the planet conquering country after country -- until it met China. In 2016, the company basically conceded the Chinese market to local players.

Today, I want to share an S&P 500 company and global leader that has cracked the code to succeeding in China. In the next five years, this company will open one new location in China every day - a total of more than 2,500. I expect that to produce record revenue and lift shares to a new all-time high.

Starbucks (SBUX) is one of the most recognized brands in the world. In most major cities across the world, it's hard to walk a few blocks without seeing the familiar Starbucks logo pasted across a green awning.

That global dominance made Starbucks one of the best-performing stocks in the S&P 500 in the last 25 years. Since going public in 1992, Starbucks' stock price has risen over 16,000%, crushing the S&P's 486% return over the same timeframe. Take a look below.

Starbucks Stock

Although it's unlikely Starbucks will repeat that market-crushing performance in the next 25 years, the global leader is entering a new phase that makes it one of the most reliable growth stocks in the S&P 500.

The U.S. Market Is Mature, But Still Growing
The United States remains Starbucks' largest market, comprising more than 50% of its global locations. Despite its dominance, Starbucks still hasn't reached its maximum saturation point in the United States.

Back in July of 2014, Starbucks CEO Howard Schultz said the company is significantly under-stored in North America. Since then, Starbucks has ramped up growth. It opened 573 net new stores in the Americas in 2015 and another 406 in 2016.

In addition to adding new stores in the United States, Starbucks is making it easier for its customers to purchase coffee. As of the end of 2016, Starbucks has expanded its drive through service to more than 60% of its locations.

Starbucks also has a hit on its hand with a popular smartphone app. The app, which has more than 10 million downloads, lets customers order coffee for pickup in store closest to them.

Despite the rosy outlook in North America, Starbucks' greatest potential lies elsewhere...

International Markets Will Be The Engine Of Growth
The real Starbucks growth story takes flight in international markets. Starbucks is in the early stages of a major international expansion, with plans to open more than 9,000 locations internationally in the next four years.

The focal point of its international expansion is China. With a population of 1.2 billion, China represents a huge opportunity for a strong global brand like Starbucks.

Today, the company's presence in China is miniscule with around 2,500 locations. But that's about to change. In the next five years, Starbucks plans to open one new location in China every day, bringing its total store count to more than 5,000. In the long run, Schultz says China is expected to eventually be a bigger market than the U.S.

From this perspective, it's easy to see that despite its incredible success in the last 25 years, Starbucks still has plenty of growth ahead. Recent efforts in North America and across the world are already paying off; 2016's $21.68 billion in revenue is a new all-time high. Take a look below.

Starbucks Stock

Starbucks Is Rewarding Shareholders With Billions In Buybacks And Dividends
Starbucks has been using its record revenue to reward shareholders with billion-dollar share buybacks and dividend payments.

In 2014, Starbucks repurchased 10.5 million shares of common stock. In 2015 it repurchased 29 million shares. In July of 2015, Starbucks authorized another 50 million share buyback, equal to more than $3 billion.

The company has also been one of the best dividend-growth stocks in the S&P 500. Its 5-year dividend growth rate of 24.7% ranks higher than 85% of its industry peers.

Starbucks Stock

Although Starbucks current yield of 1.61% doesn't jump off the page, I expect the strong dividend growth to attract income investors.

Risks To Consider: Starbucks is priced for growth. Its forward P/E ratio of 26 is a 37% premium to the S&P 500's 19. Its expansion strategy in China needs to deliver to justify that valuation.

Action To Take: Starbucks is already a massive global leader and one of the best-performing stocks in the S&P 500 in the last 25 years. Despite that success, Starbucks is entering a new phase of growth driven by an aggressive international expansion. Buy shares now below the all-time high and look for big results out of China in the coming years.

This article was originally posted on StreetAuthority.com.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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