Friday, August 29, 2014

Starbucks: The Next Dividend Growth Success Story

Starbucks Corporation (SBUX) operates as a roaster, marketer, and retailer of specialty coffee worldwide. The company initiated its dividend in 2010, and has been growing distributions rapidly since then. While the company has only managed to increase dividends for four years in a row, I believe that it has the potential to reach dividend achiever status, and have the growth story to become as successful for its dividend growth investors.

Currently, I find Starbucks to be overvalued at 28.70 times forward earnings and a low yield of 1.35%. Starbucks is a growth company, which will likely grow earnings per share by 12% - 15%/year over the next decade, which somewhat justifies the low yield and optimistic valuation. Unfortunately, I cannot get myself to pay more than 20 times earnings for a company, because I know that things could go wrong to derail even for the best crafted plans. If the company stumbles, or if stock markets finally decide to cool off a little bit during the next bear market, that would be the best opportunity to acquire a stake in this otherwise fine company. The third option for me would be to sell a long-dated put with a strike as far out as January 2016 with a strike of $70, earn a premium of $5, and pay an effective entry price of $65 per share if called out. If not, and the stock price explodes from here, I would at least earn some premium.

Check the complete analysis at Seeking Alpha

Full Disclosure: Long MCD and NSRGY

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McDonald’s Corporation (MCD) Dividend Stock Analysis

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