Key Risks
There are four main risks to know before investing in Starbucks.
First, coffee shops are an incredibly competitive industry, especially during economic downturns. For example, McDonald’s has been making great strides in its own premium coffees, which sell for significantly less than Starbucks’.
Similarly, Dunkin Brands, which until recently was a mostly an east coast chain, is now public and making a big expansion into the rest of the nation. This means that increased competition and market saturation could reduce the company’s sales growth rate and pace of new store openings.
This opens up the company to execution risk, in which, thanks to so many different growth projects going on simultaneously, Starbucks management might stretch itself too thin and end up failing to achieve traction with its new store concepts and brands.
That’s especially true when founder, CEO, and Chairman Howard Schultz eventually retires. Schultz already retired once, back in 2008, and was forced to return in 2008 because his company had spent eight years floundering with poorly executed rapid global expansion, and poor choice of foods introduced to its menus.
And while Schultz, who’s 63, may not retire for quite some time, nonetheless investors will understandably be worried about how the company might fair without the Steve Jobs of coffee at the helm.
Don’t forget that Starbucks’ earnings results are periodically negatively impacted by commodity price swings, mainly in the cost of coffee. While the company can, and does, increase prices during such times, it’s not always enough to prevent a temporary dip in margins.
In other words, if margins contract for a few quarters, don’t panic – the long-term investment thesis probably isn’t broken.
Finally, it’s worth mentioning that Starbucks’ biggest growth markets lie overseas, which exposes the company to currency fluctuations. Should interest rates move higher and take the US Dollar with it, Starbucks’ overseas sales would convert into few dollars and potentially hurt reported sales, earnings, and FCF growth. This risk wouldn’t
Dividend Safety Analysis: Starbucks
We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend. Starbuck’s dividend and fundamental data charts can all be seen by clicking here.
Our Dividend Safety Score answers the question, “Is the current dividend payment safe?” We look at some of the most important financial factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more.
Dividend Safety Scores range from 0 to 100, and conservative dividend investors should stick with firms that score at least 60. Since tracking the data, companies cutting their dividends had an average Dividend Safety Score below 20 at the time of their dividend reduction announcements.
We wrote a detailed analysis reviewing how Dividend Safety Scores are calculated, what their track record has been, and how to use them for your portfolio here.
Starbucks has a Dividend Safety Score of 98, suggesting that the company’s dividend is extremely safe. That’s courtesy of the company’s low FCF payout ratio of 42%, which is helped by the fact that its business model isn’t very capital intensive.
