Since its founding in Seattle in 1985, Starbucks Corporation (NASDAQ:SBUX) has grown into the world’s largest coffee empire and the 67th most valuable brand on earth. Along the way, Starbucks’ amazing growth story has made countless investors amazingly rich.
For example, $10,000 invested in Starbucks 20 years ago would today be worth $283,520.03 compared to just $44,044.43 invested in the S&P 500.
That’s annual total compound returns of 18.1% and 7.7%, respectively, showing just how well founder, CEO, and Chairman Howard Schultz has been at generating long-term wealth for his shareholders.
Of course past performance is no guarantee of future success, and one must always invest with an eye towards future growth, not just past glories (see seven other effective habits of dividend investors here). However, when you dig deep into Starbucks’ business model and factor in management’s growth plans, the company’s best days could still lie ahead of it.
Let’s take a closer look at this business for consideration in our Long-term Dividend Growth portfolio to see if dividend growth investors should climb on board the Starbucks Espresso train.
Business Description
Starbucks is the world’s largest coffee purveyor with just over 24,000 stores in 72 countries, where it sells not just premium coffee but also tea, packaged coffee, juices, bottled water, pastries, and various lunch items.
In addition, the company licenses several of its products, which are available in supermarkets and stores, and operates other up and coming fast casual restaurant brands such as Teavana, Tazo, Seattle’s Best Coffee, Evolution Fresh, La Boulange, and Ethos.
In its most recent quarter, the vast majority of its sales came from the company’s namesake, company owned stores.
| Business Segment | Revenue | % of Revenue |
| Company Owned Stores | $4.182 billion | 79.8% |
| Licensed Stores | $527 million | 10.1% |
| Consumer Packaged Goods | $529 million | 10.1% |
Source: Earnings Release
By geography, Starbucks generated 69% of its revenue last year in the Americas (U.S., Canada, Latin America); 13% in China / Asia Pacific; and 6% in Europe, Middle East, and Africa. The remaining 12% of revenue was related to channel sales of Starbucks’ products and other business segments.
Business Analysis
Despite its already massive size, Starbucks has been able to generate impressive sales, earnings, and free cash flow (FCF) growth over the last few years.
This strong growth is largely due to Starbucks’ ability to continue bringing in more foot traffic to its stores and raise prices consistently thanks to its strong brand, which gives it a solid moat against rivals such as Dunkin Brands Group Inc (NASDAQ:DNKN).
Even more impressive than its solid top line growth however, is Starbuck’s ability to grow its bottom line earnings and FCF per share, which funds the growing dividend, even faster.
In fact, thanks to increased cost efficiencies made possible from its vast economies of scale and hyper efficient supply chain, Starbucks was able to grow FCF per share, one of the most important dividend metrics, by an astounding 65.5% year-over-year last quarter.
Source: Earnings Release, 10-Q
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