Should You Avoid Starbucks After its 73.2% Rise In The Last Year?
Over the last couple months, I’ve shown you stocks to avoid…
Stocks to consider buying…
And some of the best stocks related to the coming Internet of Things… Which you can find linked further below.
All these recommendations are to help you either avoid pain and terrible stocks. Or to help you find potentially great stocks to invest in during this pandemic.
If you do both well, it helps you earn higher than average investment returns and build wealth.
Because the fewer investment losses you have the more capital you keep. And the more capital you keep the faster you compound your money.
Today, I want to answer – Should You Avoid Starbucks After its 73.2% Rise In The Last Year?
Starbucks (SBUX) is one most recognized and largest brands in the world.
Its popular offerings include coffee and coffee related products, breakfast items, sandwiches, and more.
Its so powerful that it now has more than 32,900 stores in 83 different countries as of December 2020.
And Forbes estimates that the Starbucks brand is the 37th most valuable brand in the world that’s worth $17.8 billion… Just the brand.
Its business initially took a large hit due to Covid restrictions worldwide leading to the closure of its stores. But they’ve now bounced back well and its on track to have a great 2021.
And because of its continued strength, its stock is up 73.2% in the last year even with the many closures.
This is the power of Starbucks.
But this is in the past and it doesn’t help us figure out if it’s a great buy now.
That’s what I want to help you figure out today.
It’s based in Seattle Washington. It has a $125.78 billion market cap. And it pays a 1.7% dividend… Which is reason #1 to consider buying its stock.
Starbucks’ 1.7% Dividend
Over the last decade Starbucks’ paid out a total of $8.32 per share in dividends.
At today’s share count of 1.179 billion shares that’s equal to $9.81 billion paid out to shareholders in that time.
It also grew its dividend 546% from $0.26per share in 2011 to $1.68 per share now.
These dividend payments will help you in normal times earn cash if you take the money out. Or allow you to buy more shares over time if you reinvest the dividends.
These regular payments will help you earn more money for your retirement. And the solid, stable, and growing dividends will help in any kind of prolonged economic issues like we’re dealing with today.
It can do this because it earns solid profits. Which is reason #2 to consider Starbucks for your retirement portfolio.
Starbucks Earns Solid Profits
Over the last decade it earned an average operating income margin of 14.8% per year.
I look for anything above 10% so this does not meet my threshold.
Another way to show this is with its free cash flow to sales ratio (FCF/Sales). Over the last decade its 11.7% per year on average.
I call this the “Cash Machine” metric.
I look for anything above 5% on a consistent basis for the same reasons as I look for high operating profit margins above. If a company surpasses both thresholds it makes it a great operating business that is safe and ultra-valuable.
Yes, Starbucks margins on both fell a lot last year during Covid due to the closures – 5.5% and 0.8% respectively.
But this is also why I look over the long term… So short term fluctuations like this don’t bias me either negatively or positively when looking at a company.
Plus, for Starbucks to not only survive the pandemic while more than 110,000 restaurants closed for good… But it to remain profitable during these closures and economic destruction shows you the power of the company.
What about its debt levels? These are super important every time I analyze a stock for you. And this is where we get to some issues for Starbucks…
Starbucks Has Low Debt
As of this writing SBUX has $5.26 billion in cash compared to $24.94 billion in debt.
As a percentage of its balance sheet total liabilities make up 126.4%. I’ll detail this shortly.
Debt makes up 19.4% of its market cap.
And its debt-to-equity ratio is unreadable because of its high liabilities.
What does it mean that as a percentage of its balance sheet total liabilities are greater than 100%?
That after subtracting total liabilities from its total assets you get a negative book value AKA shareholders equity.
Meaning, that based on its balance sheet its shares you buy on the market are worth less than zero.
Now in a real-world sense that’s not what it means because the balance sheet doesn’t include any value from Starbucks ultra-valuable operations. And its operations are incredibly valuable.
But its still a problem because you want any investment to have what’s called balance sheet strength.
Typically, this means a company having more cash than debt… And relatively low debt levels and total liabilities.
Starbucks liabilities are too high… Even though its ultra-profitable.
Largely due to operating leases and purchase obligations as you can see in the chart below from its annual report.
Operating leases are things like the leases for its stores… And purchase obligations are agreements for say things like coffee beans.
Both are necessary to run the business, which means these are real costs and expenses the company must pay.
And these are super high compared to the rest of its balance sheet which is why after subtracting its total liabilities from total assets you get a negative number.
Again, it’s not a massive deal here with Starbucks because its operations are so profitable… But it is a red flag nonetheless because it lowers the margin of safety in potentially buying Starbucks stock.
What about its valuation? Is it cheap enough to buy?
Starbucks IS NOT Cheap…
With the markets at or near all-time highs you’d expect a fantastic stock like Starbucks to be selling at an enormous valuation.
Unfortunately, it is.
As of this writing its P/E is 186.6.
Its P/CF is 78.5.
Its forward P/E is 36.9.
And its enterprise value to operating income – EV/EBIT is 111.9.
On all three metrics at the top, I look to buy investments below 20 to consider them undervalued.
And on EV/EBIT I look to buy stocks below 8.
These metrics combined show that Starbucks is massively overvalued right now.
And this means owning its stock does not give you a large margin of safety in investing terminology.
When you invest in stocks that have a margin of safety it makes the investment safer. And it also means you should expect to earn higher returns owning it in the coming years.
The inverse of this is also true…
When you invest in a stock without a margin of safety it makes the investment riskier. And it also means you should expect to earn less owning its stock going forward.
With Starbucks being massively overvalued right now, its stock offers you no margin of safety. And this makes buying its stock incredibly risky right now.
If you’re looking for a solid, safe, stable, and enormously profitable investment to buy to earn high and safe returns for your portfolio – avoid Starbucks due to its liabilities and enormous overvaluation.
And consider one of the other investments below.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.