Stocks Investment

Starbucks: The Ultimate Dividend Growth Stock For Young Investors

For the past few weeks, I have been trying to situate where Starbucks (SBUX) fits in public life in the new normal as the pandemic rages and post pandemic.

I started and deleted several article drafts because I wasn’t certain where the answer lies. However, I decided to move forward because I’m not sure Starbucks knows exactly where it fits either. And that’s not necessarily a bad thing.

Even in the present environment, Starbucks deserves a place in dividend growth investing (DGI) portfolios, particularly for young investors.

Is Starbucks Still A Third Place?

I’m interested in the notion of Starbucks as a community gathering place for a couple of reasons.

First, I have a degree in urban studies. In undergraduate and grad school, I spent my time studying public space and sense of community. One of my favorite books remains the modern sociological classic by Ray Oldenburg, The Great Good Place: Cafes, Coffee Shops, Bookstores, Bars, Hair Salons, and Other Hangouts at the Heart of a Community.

Long title, but it saves me the trouble of having to summarize what the book’s about.

To the chagrin of countless academics, Starbucks co-opted Oldenburg’s use of the term “third place” in the ’90s. The idea that while people spend most of their time at home and work (the first and second places), thriving communities consist of third places. Places where people congregate to socialize, form bonds, and, quite possibly, cultivate a sense of community.

But it doesn’t have to be that lofty. Everyday social interaction occurs in third places, adding to the vibrancy and general fabric of urban life.

Second, all of this matters immensely to the investment case. It clearly matters to Starbucks. CEO Kevin Johnson continues to advance and broaden the definition of a third place as it pertains to Starbucks:

Our vision is that each large city in the U.S. will ultimately have a mix of traditional Starbucks cafés and Starbucks Pickup locations. With Starbucks Pickup stores located within walking distance of a traditional Starbucks café, customers can choose to enjoy their Starbucks Experience in a Starbucks café or pick up their order at either that café or a nearby Starbucks Pickup store… No matter the format, we know that the Starbucks “third place” experience occurs from the moment a customer envisions their daily Starbucks Experience to wherever they enjoy that Starbucks beverage. (emphasis added)

I wonder what the aforementioned academics, particularly Oldenburg, think of that!

Johnson basically shifted the meaning of a third place to be anything. You can order your coffee from your phone, pick it up at a Starbucks, do little more than bark your name at the barista, then “enjoy” your Starbucks beverage in an alley somewhere, and that’s a third place experience.

I wonder what Oldenburg thinks of that!! Apparently, the company tried to get Oldenburg to endorse Starbucks, but he said no. Sadly, he often receives no credit for coming up with the term in the first place. But I digress.

At around the same time of the last excerpt, Johnson was saying things like this:

Human connections will not only be restored, but reinforced and re-invigorated. The third place will not just survive, but with adaptations and new routines, it will thrive.

He wrote that in an article posted to Starbucks’ website, entitled: The third place, needed now more than ever before.

That sounds more like being a third place within the original context of spaces where people gather, linger, socialize, and order a second cup.

Here’s more from Johnson on the company’s Q3 2020 conference call:

We have been blending store formats in suburban markets for years where we have complemented traditional Starbucks stores, the third place experience, with drive-through and mobile order pickup experiences that serve customers’ need for convenience. We are introducing a simple handheld device to further increase throughput and improve the customer experience. And we are introducing a new curbside pickup experience that will be available in 700 to 1,000 locations by the end of this quarter…

While I don’t have answer to the more theoretical question of what’s going to happen to the third place as I know and studied it, it’s pretty obvious what Starbucks is doing. It’s doing what it does best – positioning itself to pivot.

Starbucks has always been great at preparing for change and the future. The difference between how it’s doing it now and how it has always done it is that a) the future is uncertain (and unwritten), so b) the company can’t function as the visionary it once was.

Starbucks’ Digital Roots

I have been covering Starbucks for a while. I was super hot on the stock in and around 2013, when I spent a lot of time speaking with former executives Adam Brotman and Stephen Gillett.

Long story short, these guys are two of the most brilliant tech executives to have ever lived. Together, they conceived, conceptualized, and helped implement and execute Starbucks’ entire digital infrastructure. The app, mobile ordering, rewards… all of it.

At the time, I argued consistently that Starbucks was a tech company. My overarching theme was that more names in the broad retail and consumer spaces needed to act like Starbucks, which had more of an Apple (AAPL) or Netflix (NFLX) vibe than a food and beverage one.

One of the few that came close is Domino’s Pizza (DPZ). Like Starbucks, Domino’s vision rewarded, and continues to reward, investors, though DPZ has returned considerably more. For the record, Domino’s was one of the top-performing stocks of the last decade. It has taken a $10,000 investment to the stratosphere.

ChartData by YCharts

As we sit with so many questions today, one thing is certain. Without the genius of Brotman and Gillett, Starbucks wouldn’t be able to do what it’s doing today.

I don’t simply mean have a digital presence and execute so well on it, but be able to forge ahead with concurrent confidence and uncertainty.

Starbucks’ digital dominance gives it the flexibility to play both ends of the spectrum – favoring digital, mobile, and on-the-go at the moment – while it waits to see how things shake out. Without that early obsessive focus on digital, without visioning the future the way it did a decade ago, the company would not be able to weather the pandemic as well as it has and will continue to.

It’s worth knowing this history as you look around and try to figure out who the Starbucks and Domino’s of tomorrow will be.

Adding SBUX To Our Redefining Retirement Portfolio

To initiate our Redefining Retirement Portfolio, we bought 25 shares of Apple. Because I wrote this article right after the one including the AAPL purchase, we’ll use Friday’s closing price of $76.53 and add 100 shares of SBUX (a $7,653 investment). The next time we add a stock to this portfolio, I’ll provide a Google Sheets portfolio tracker that includes the annual dividend income for each holding.

Like Apple, Starbucks isn’t a Dividend Aristocrat… yet. It has produced 10 consecutive years of dividend growth. I’m confident the company can continue this trend. Here’s what it said about that on the recent call:

Our $3 billion bond issuance in May enabled us to fund these investments, cover our capital expenditures, pre-fund next year’s bond maturities at attractive rates, and of course, sustain our quarterly dividend payments, honoring our commitment to shareholders. Importantly, as we exited Q3, we were cash flow positive with upward momentum, setting us on a solid path to reduce our financial leverage in future quarters.

I don’t know what the future holds for coffee shops. It matters to me personally because it’s one of the few things I miss about pre-pandemic life – bringing my laptop to my local coffee shop and working while drinking coffee and mingling for a few hours.

I have always liked Starbucks because of the digital story. I have never been a consistent Starbucks’ guest. I prefer local coffee shops as an urbanite, a consumer, and somebody who likes coffee. Though, I must say Starbucks’ Nitro Cold Brew is among the best drinks on the market today.

That said, the beauty of Starbucks is that none of this really matters much. Whether I like it. Whether you like it. Whether it will become, by and large, an on-the-go, mobile/digital experience or return to more in-cafe dining remains to be seen. But, again, it’s almost moot. The company has positioned itself for either eventuality or some more evenly distributed mix of both.

Given the impact of COVID-19 and the continued uncertainty, it almost doesn’t make sense to look at the numbers. Nevertheless, here are a few, focused on mobile/digital, also from the conference call:

  • (…) customer usage of mobile ordering increased to 22% of total transactions, up 6 percentage points from a year ago.
  • Almost 90% of sales volumes in Q3 flow through the combination of drive-through and mobile order-and-pay.
  • Mobile order sales mix reached 23% of sales in Q3 with 12% coming from delivery and 11% from mobile order-and-pay, well above the mid-teens levels we saw pre-COVID.

Also from the conference call, this is key to the story, particularly as it pertains to the stock being one that can resonate with young investors:

Although, our digital platform continues to be a source of strength, disruption to the weekday morning routines, notably, commuting to work and school is a headwind we are focused on across the U.S. as we continue to recover our business.

We continue to see improvements in the morning peak period as well as some customer occasions shifting to later in the morning daypart. As we see customer visits shifting from urban cafes to suburban drive-throughs, customers are also purchasing multiple beverages and food items on a single order, essentially a group order.

If you’re trying to sell young investors on a stock, it needs a story. If it’s a story they can relate to, all the better.

I don’t think there’s anyone in America who can’t relate to Starbucks’ present situation, the disruption to its business, and how its incredible digital presence has helped mitigate the damage. We’re essentially living it with them.

Even if you go to a local coffee shop instead of a Starbucks (and most Americans probably don’t), you can still see first-hand how food and beverage establishments have had to adapt. Some have done it better than others. But thanks to their scope, size, and digital wherewithal, Starbucks leads the transition even as it’s unclear – like the rest of us – on what the future holds.

Starbucks can no longer dictate the future. The pandemic – and our collective response to it – does. But like so many other companies in the broad retail space, COVID-19 hasn’t rendered Starbucks helpless and hopeless.

That’s the type of company you want to invest in. One that’s prepared to pivot. One that can literally do it overnight based on local conditions.

While not everyone will agree, I think there’s relatable logic to the bull case I articulate in this article. And we didn’t even get into the international story, which is as important, if not more, than the domestic one.

Disclosure: I am/we are long SBUX, AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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