Given that my DGI portfolio is less than a month old, today was the first opportunity that I’ve had to make a buy since completing the first wave of purchasing.
I’ve actually had the funds available in my account for a little over a week and I’ve been monitoring my portfolio, as my original plan was to add to an existing position. And I was certainly tempted to add to AT&T (T) or Johnson & Johnson (JNJ).
But ultimately I veered from that idea and decided to buy Starbucks.
Why Not T or JNJ?
Before I get into why I decided to buy Starbucks, let me explain my rationale for not adding to my positions in T or JNJ–which are both at very appealing prices right now in my opinion.
Even though AT&T is currently at a very appealing price, outside of the stocks that I’ve owned for a number of years before my recent focus on DGI–Apple, Abbott, and AbbVie, AT&T is currently my largest holding at approximately 3% of my portfolio. I’m definitely a fan of their yield, and I believe they are well positioned with the acquisition of Time Warner and for the race to 5G.
However, their “G” portion of DGI is underwhelming.
In large part the same holds true for Johnson & Johnson, although their DAGR is certainly not as lackluster as AT&T given that they have averaged slightly over 6% when looking at both the 3-year and 5-year DAGR.
Don’t get me wrong either–I love both of these stocks in my portfolio, and with JNJ being slightly underweight right now I was extremely tempted to add to my position at these levels in the low 120’s.
Put Your Money Where Your Mouth Is
Before I get into the details on why I selected Starbucks, let me recap the purchase.
I don’t know about where you live, but just about every Starbucks that I visit in my area has a line of cars wrapped around the building and a healthy crowd inside the store as well–at just about any time of the day. My wife and I have been known to enjoy a Strawberry Refresher from time to time, and our teenagers go with their friends more than I care to think about as well.
Therefore, after seeing the downward pressure in the after-hours market on Tuesday night, I decided to keep an eye on Starbucks and look for an entry below $52.00. I didn’t initially set a limit order as I wanted to see just how far it might drop before making my decision to buy, however I did setup an alert to notify me when the price dipped below $52.
Unfortunately, I was tied up with work when the alert came through and by the time I checked things the price was back above $52.00/share. I decided to set my limit order at $51.85 and see if my price would be met.
My rationale for the limit price was that this was roughly the mid-point of the low for the day (and new 52-week low) and $52.00, which is where I found SBUX to be an attractive buy.
What I Like About Starbucks
One of the key drivers for me to select Starbucks was that their dividend growth has been far more impressive than the two aforementioned choices from my existing portfolio. They have been averaging over a 23% increase in the same 3-year and 5-year periods–and who doesn’t like sustained double digit dividend growth.
As I evaluated them against my DGI portfolio guidelines, Starbucks checked every box except for the dividend yield of +2.5%.
Not too shabby.
In support of their historical DAGR, Starbucks just announced a 20% increase in their quarterly dividend and raised their target to return $25 billion to shareholders via buybacks and dividends.
With the increase in the dividend, this will add $28.80 in forward dividend income.
Starbucks is also continuing to expand across China, as they plan to open approximately 3,000 more stores over the next few years. That certainly comes with a good degree of risk, however Starbucks is betting on their ability to repeat the success that they’ve had in the United States.
However, it isn’t all roses.
What I Don’t Like About Starbucks
As much as I like the dividend growth, this purchase was not made without some hesitation which in large part is due to their revised forecast for same stores sales growth from 3% to 1% in the 3rd quarter. This includes the expectation for same store sales in China to be flat–which as I mentioned is a risk on their investment in China.
Starbucks also announced that they expect to close 150 poorly performing stores next year. Normally they close an average of 50 stores per year, so this is a significant spike up.
With the revised sales growth forecast and increase in store closures, analysts have been downgrading Starbucks left and right.
Lastly, in quite a few of the online groups I visit related to DGI investing, I was seeing quite a few people turning their nose at Starbucks and selling their positions. I’m usually the black sheep in most gatherings, so as people are selling I decided it was time for me to be one buying their shares.
There is no doubt about it that there are some concerns involved with Starbucks, and I may watch this one a little closer than some of the other positions in my portfolio.
CEO Kevin Johnson recently stated, “Our recent performance does not reflect the potential of our exceptional brand and is not acceptable.”
That comment from the CEO sums up my feelings about this purchase, as while I think there may still be some short-term volatility, I am betting on the fact that they will address these issues over the long-term horizon that I plan to hold most (all) my positions.
What do you think about Starbucks? Sound long-term buy or too risky?