It is not an overstatement to say that the earnings season is off to a horrendous start. Alphabet (NASDAQ:GOOG), Microsoft (NASDAQ:MSFT), Visa (NYSE:V), and Starbucks (NASDAQ:SBUX) are all selling off. Some are warranted, while some aren't. This article focuses on Starbucks and stresses why investors should look at the long-term picture. Let us get into the details.
Starbucks posted an inline EPS while missing the revenue estimate by $40 million. But there were a lot of positives in this specific quarter, like the 18% increase in China revenue and the increase in operating margin. The company also reaffirmed the EPS view for 2016. But the market seemed to focus on comparable store sales being a "low" 6%. Keep in mind that the consensus for same store sales was only 6.70% anyway.
Buried under the negative headlines is the fact that the company added more to its buyback program. Starbucks added 100 million more shares to its existing buyback program and that's good enough to retire nearly 7% of the company's total outstanding shares. In other words, the new buyback is worth a cumulative $5.8 billion to shareholders based on current market price. Being a dividend payer, Starbucks gets dual benefits by retiring shares: it increases the EPS and also reduces the company's long-term dividend commitment to shareholders.
The sell-off has also pushed the stock's current yield to almost 1.40%, which is close to its five year highs. Starbucks is still in its early stages as a dividend paying company and has plenty of room for dividend increases along with growing cash flow. The last dividend increase was by a monstrous 25% and if the company sticks with the same percentage this time, the new annual dividend will be $1.00 per share. That will push the yield on cost to 1.80% for investors buying here. Not a bad deal for a company expected to grow earnings at 18%/yr for the next five years.
Speaking of growth, Starbucks investors can very well expect capital appreciation as well. In fact, that is still the main part of the story and dividends are a sound second. Even in this supposed bad quarter, EPS grew by 18%. If you don't believe 18% growth is sustainable, fair enough. Let's assume 12% for the next five years. Starting at 2016's expected EPS of $1.89, a 10% annual growth will place the 2021 EPS at $3.30. Assigning a market average multiple of 22, we arrive at a share price of $73. Not a staggering return but a good package when you factor in the dividends, buyback, and the fact that the expectations are watered down.
But what if the market sells off and the market multiple goes down? That is the time investors need to shop for quality stocks. Starbucks is one of the stocks with the unique mixture of growth, current income, and income growth potential.
Global Growth Prospects:
At some point, same store sales will get stagnant for every company. What matters more is, what is the company doing about it. Starbucks is doing all it can by trying out new express stores in Chicago, opening more regular stores in the US and by strategically going abroad.
Starbucks just opened its first store in South Africa, which has the second largest GDP in Africa. It is fair to say this won't be the last store the company will open in this country. While some investors might have concerns about the developing nations being able to afford the Starbucks premium for a coffee, keep in mind that we aren't talking about an iPhone or a BMW. The middle class in these countries are very likely to be able to afford the premium that Starbucks demands. What we love about the company's management is its cautious approach of opening a few stores in select locations before moving aggressively.
Back in 2012, the company opened its first store in India, another great target with booming middle class. Starbucks got into a partnership with a marquee Indian brand, Tata Global Beverages. In about three years, the partnership has expanded has now expanded to 76 stores.
Starbucks is not chapter to be read for 2016. It's not even a 2020 story. This is a carefully constructed, multi-decade novel. Stay patient and accumulate for the long-term.
A last question to ponder: is it fair to say a "company didn't meet expectations"? Or should we change it to "analysts didn't get it right again"?
Disclosure: I am/we are long SBUX, GOOG.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.