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Starbucks Corporation (SBUX), Dunkin Brands Group Inc (DNKN): These Companies are Worth Researching

You may hold a desire to invest in the stock market, but you may be wondering, “Where do I begin?” The answer is simple–look no further than the companies responsible for bringing you your cup of coffee. Of course, you can’t just invest in a coffee company just because you like the taste of your brew. The importance of research into the company’s fundamentals and what drives it can’t be overemphasized.

Starbucks Corporation (NASDAQ:SBUX)

Qualities of a strong coffee company

Three major publicly traded companies focus directly on conveniently bringing you coffee during your rushed morning routine: Starbucks Corporation (NASDAQ:SBUX), Dunkin Brands Group Inc (NASDAQ:DNKN), and Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR).

Each of these companies displays the following three qualities:

1. Brand recognition

2. Product quality and innovation

3. Strategies to strengthen and expand their brand

A name synonymous with quality

With nearly 19,000 stores worldwide, the Starbucks Corporation (NASDAQ:SBUX) name equates to quality coffee and cappuccino in the mind of the collective consumer. Its emphasis on product quality gives consumers reason to pay extra for its products without guilt.

Starbucks Corporation (NASDAQ:SBUX) innovation in being innovative (emphasis mine) represents an interesting aspect of this company. For example, Starbucks owns a website where people can submit ideas of all sorts, from new product ideas to customer service experience and community involvement. It also allows for online community discussion.

Starbucks Corporation (NASDAQ:SBUX) employs various strategies to strengthen and expand brand recognition. For example in its last shareholders meeting, the company introduced a “cross-channel, multi-brand loyalty program” where the customer can purchase its various products across different channels such as grocery stores for points redeemable for free products at Starbucks stores.

Another example includes Starbucks Corporation (NASDAQ:SBUX) expansion of its long-term strategic partnership with Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR). Starbucks will allow Green Mountain Coffee to make K-Cups and Vue Packs with Starbucks labeling.

Starbucks Corporation (NASDAQ:SBUX)’ efforts to build and maintain brand recognition as well as product innovation resulted in excellent fundamental strength and superior share price appreciation. Starbucks saw its revenue increase 14% in 2012, and operating cash flow increased 9%. However, increased investment spending caused free cash flow to decline 25%.

Starbucks maintains an excellent balance sheet. Cash and investments comprise 42% of stockholder’s equity, while long-term debt to equity ratio stands at a very low 11%. In 2012, Starbucks paid out 57% of its free cash flow in dividends. It currently pays $0.84 per share per year and yields 1.3% as of this writing.

Look for the company to capitalize on the healthy lifestyles trends as it incorporates and expands its Teavana brand. In addition, the company stills possesses a relatively small number of stores in China and emerging markets such as those in Africa, which means it still has room for expansion.

Donuts, coffee, and ice cream

Dunkin Brands Group Inc (NASDAQ:DNKN) owns not one but two iconic brands: Dunkin’ Donuts and Baskin Robbins. Dunkin Donuts sells all kinds of breakfast food to the hurried morning time commuter, from coffee, donuts, breakfast burritos and bagels. Baskin Robbins, an old brand name that goes back decades, sells high quality ice cream and cakes.

Dunkin Brands Group Inc (NASDAQ:DNKN) launched 30 new products in 2012. Examples include K-Cups with Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR), a new red velvet donut and an Oreo Coolatta.

One of Dunkin Brands Group Inc (NASDAQ:DNKN)’ greatest strength lies behind its “asset light model.” You may ask “Why would I want to own shares in an asset light company?” This means nearly 100% franchised ownership. The franchisee performs all of the heavy lifting when it comes to overhead. This also allows Dunkin Brands to focus on product innovation, which keeps customers coming.

This asset light model shows its strength in the company’s free cash flow margins. Dunkin Brands Group Inc (NASDAQ:DNKN)’ free cash flow is an impressive 20%, versus 7% for Starbucks and 2% for Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) as of the end of 2012. Dunkin Brands also sports the highest return on equity at 31%, versus 27% for Starbucks and 16% for Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR).

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