Portfolio X-Ray: Starbucks

Note: Read this introduction to see what I am doing in this series.

About Starbucks
Yet another company in my portfolio that is kind of ubiquitous to most American consumers. Starbucks (Nasdaq: SBUX) sells coffee and other things that go well with coffee, or in the words of the company itself:

“Starbucks is the premier roaster, marketer and retailer of specialty coffee in the world, operating in 60 countries. Formed in 1985…(w)e purchase and roast high-quality coffees that we sell, along with handcrafted coffee, tea and other beverages and a variety of fresh food items, through company-operated stores. We also sell a variety of coffee and tea products and license our trademarks through other channels such as licensed stores, grocery and national foodservice accounts. In addition to our flagship Starbucks brand, our portfolio also includes Tazo® Tea, Seattle’s Best Coffee®, Starbucks VIA® Ready Brew, Starbucks Refreshers™ beverages, Evolution Fresh™, La Boulange bakery brand and the Verismo™ System by Starbucks.” 

Starbucks hit a snag when Howard Schultz stepped away from the company in 2000, and expanded too fast and lost its way as a coffee company, even expanding into movie production with the release of Akeelah and the Bee in 2006. The Starbucks brand had been diluted through the choice of bad franchise operators and expansion into markets that may not have been ready for its presence.

Schultz returned to the company in 2008, and since then, the company has refocused on coffee and other coffee-type beverages. The acquisitions of Tazo Tea and La Boulange, among others, showed that the company was refocused on becoming the leading coffee brand in the world. The company also repurchased — and closed where appropriate — franchise locations that were under-performing. And over the past 5+ years, the stock has performed exceedingly well, returning over 300% for investors:

Per Yahoo! Finance. Closing price adjusted for dividends and splits

Per Yahoo! Finance. Closing price adjusted for dividends and splits

Why I Invested
Similar to my investments in Ford (NYSE: F) and Waste Management (NYSE: WM), one of the reasons I decided to invest in Starbucks was its dividend. Its dividend is relatively new, being paid for the first time in April 2010, and paid quarterly beginning in August 2010. Since then, the dividend has doubled, and still has room to grow, with a little less than 40% of earnings currently paid as dividends. The company should continue to raise its dividend going forward, allowing my investment to grow going forward.

As a qualitative investor, I am also a fan of the leadership of Howard Schultz. His return thus far has been great for shareholders, and I don’t see him leaving the company (again) any time soon. In the meantime, the company will expand smartly over the next few years, planning on opening 1,300 stores this year alone, with almost half this growth occurring in China, where it already has over 3,000 stores.  Though China tends to be a tea drinking culture, Starbucks’ acquisitions of Tazo Tea and other brands allows them to cater to the wants and desires of its future Chinese customers, as well as potentially expand into other markets that don’t have a coffee culture similar to the United States. This bodes well for the company going forward.

When I Would Sell
With an investment decision based around the leadership of Howard Schultz, his departure could lead me to reevaluate my position in the company. However, like other great leaders, I am sure that his transition — whenever it should happen — will be handled appropriately and a successor should be able to continue the direction of the company going forward.

Starbucks joins Ford and SodaStream (Nasdaq: SODA) in helping me get some exposure to non-US markets, and should the expansion plans in China not be as successful as thought, it would lead me to seek some international growth potential elsewhere. Nevertheless, my position in Starbucks is the first position in my portfolio that I am not as wedded to as the others previously profiled, and I might be more willing to take my winnings and reallocate elsewhere.

Until next time…

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