Turbulent times

Before you spit out your flat white in panic, let’s focus on the facts. Sure, the company has hit a bit of a rough patch lately. Global sales have gone as cold as a forgotten frappuccino, dipping 3% in the last quarter. The company’s been facing a triple shot of challenges: customer grumbles over wait times, eyebrow-raising price hikes, and a swirl of controversy stemming from the Israel-Gaza conflict.

But wait! Just when it looked like Starbucks might be running out of steam, they’ve pulled an ace barista out of their apron pocket. Enter Brian Niccol, the mastermind behind Chipotle’s sizzling comeback. This chap turned a burrito chain from food poisoning pariah to Wall Street darling. Could he be the secret ingredient to brew up a Starbucks renaissance?

The market certainly seems to think so. The shares shot up faster on the news than an espresso-fuelled customer, leaping over 20% following Niccol’s appointment.

The numbers

Let’s not forget, the firm still has a lot going for it. With a market cap frothing over $108bn and annual revenue that could buy a small country’s worth of coffee beans ($36.48bn, to be precise), this is no corner café we’re talking about. The price-to-earnings ratio of 26.1 times suggests it’s not as overpriced as some fancy single-origin pour-overs.

For income-seekers, the company continues to serve up a tasty dividend yield of 2.43%. With a payout ratio of 64%, there’s still plenty of room in the cup for potential dividend growth. And looking ahead, analysts are forecasting earnings growth that’s hotter than a freshly steamed latte at 9.73% per year.

Of course, it’s not all unicorn frappuccinos and rainbow cake pops. The business faces stiffer competition than ever in the premium coffee space. It is also grappling with labour disputes and the ongoing challenge of wooing younger consumers who might prefer their caffeine fix from trendier local spots.

Furthermore, even though a discounted cash flow (DCF) calculation suggests the current share price may be undervalued, there’s still only about 9% growth before an estimate of fair value is reached. Not exactly the sort of explosive growth or potential many investors are looking for.

One to watch

So, is Starbucks in trouble? Not quite. I’d think of this more as a need for a refill rather than a full-blown spill. With its robust brand, global reach, and a new CEO who knows how to turn up the heat, management clearly has the ingredients needed to brew up a comeback.

As Foolish investors, we know that sometimes the most tempting opportunities come when a great company hits a temporary rough patch. I suspect the current situation could be just such a moment. While there are certainly challenges ahead, this coffee colossus has weathered storms before and come out stronger. I’ll be keeping an eye on performance over the next few months, so this is definitely one for my watchlist.

The post After losing its CEO, is this S&P 500 company in trouble? appeared first on The Motley Fool UK.

Here, I’m going to highlight two dividend shares currently in oversold territory. From a long-term investment perspective, I think they look interesting right now.

What does oversold mean?

Before I discuss the two stocks, it’s worth explaining what the term ‘oversold’ means. Often, investors use it to describe stocks that have experienced large share price falls. And that’s fine.

However, the technical definition of an oversold stock is one that has a ‘relative strength index’ (RSI) of less than 30.

The RSI is a technical indicator that measures the magnitude of recent share price movements. It’s this definition that I’ll be using here.

A high-quality stock

Moving on to the stocks, first up is US-listed coffee giant Starbucks (NASDAQ: SBUX). Down about 20% this year, it currently has an RSI of 22.

Now, this stock’s historically been an excellent long-term investment. However recently, the company has experienced a slowdown in sales in the US and China, sending its share price down.

But I believe the company has the ability to return to growth. Faster service and more promotions could help to turn things around. As could an improvement of its stores.

After the recent share price fall, Starbucks shares trade on a forward-looking P/E ratio of about 18.

That’s not a super-low earnings multiple. But for a company with a powerful brand, a very high return on capital, and an excellent dividend growth track record (over the last 13 years the dividend has grown by around 20% a year), I’d argue it’s quite attractive. The stock’s yield is currently about 3.2%.

Of course, there could potentially be further share price weakness ahead. Especially if economic conditions in China remain weak.

It’s worth noting that an oversold stock can remain oversold for a while. It can even get more oversold. Taking a long-term view, however, I think this stock has considerable potential.

A beaten-up chip stock

The other stock I want to highlight is semiconductor powerhouse Intel (NASDAQ: INTC), which is also listed in the US.

Down nearly 40% this year, it currently has an RSI of 23.

Now, most semiconductor stocks have performed well recently. Not Intel though. It has suffered due to the fact that the artificial intelligence (AI) boom has diverted spending away from the group towards companies that produce AI chips, like Nvidia and AMD.

Losses in the company’s foundry (chip manufacturing) business have also spooked investors.

I see the potential for a rebound, however. Recently, Intel launched its own chip for AI (the ‘Gaudi 3’).

Meanwhile, CEO Pat Gelsinger has said operating losses for the foundry business will peak this year.

I’ll point out that I don’t expect the chip stock to rebound in the short term. Ultimately, it’s going to take a few years for Intel to get its growth and profits up.

Issues such as US government export restrictions could put further pressure on growth in the near term.

Taking a five-year view however, I think the stock – which currently trades at 15 times next year’s earnings forecast and yields about 2% – could produce decent returns.

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Even the best companies can be hit by temporary or short-term difficulties. And I think this is happening at the moment with both Diageo (LSE:DGE) and Starbucks (NASDAQ:SBUX). 

Diageo

Diageo shares are just above their 52-week low and the stock comes with a dividend yield approaching 3%. This looks like an opportunity to me.

The issue Diageo has been facing is that its premium spirits business is more cyclical than investors realised. Demand has been falling, most notably in the US, Latin America, and the Caribbean.

This is the result of consumers looking to pull in their spending in a difficult economic environment. But this has taken the market by surprise and the stock has been falling as a result.

My view of Diageo’s brands is the opposite. I think there’s a long-term trend towards more premium drinks, but the path there is likely to be bumpy and sensitive to the broader economy. 

As a result, I see this as a chance to be greedy when others are fearful. I expect the share price to recover as demand returns, so I think buying the stock now could be a good idea.

Starbucks

Starbucks has also been suffering from unusually low demand. News of revenues declining by 1.8% during the first three months of 2024 caused the stock to crash to a 52-week low.

The worst region was China, where sales fell 8%. The issue isn’t that Starbucks does a lot of business in China, it’s that the region was supposed to be a big part of the company’s future growth.

Escalating tensions between the US and China have looked like a risk to me for some time, but I don’t think the share price has ever really reflected this. That’s changed now though. 

At a price-to-earnings (P/E) ratio of 22, the stock doesn’t look like an obvious bargain. But I think there’s significant potential for earnings to rise as the business recovers from a cyclical downturn. 

I might be sceptical about China, but I’m optimistic about the US, where Starbucks generates around 70% of its revenues. As I see it, the prospects for a recovery there are much brighter.

Passive income

At today’s prices, I’d be happy buying shares in either Diageo or Starbucks. Both look like strong businesses that I expect to benefit from a cyclical recovery in due course.

More importantly, both stocks are trading at unusually low prices. As a result, the dividend yields are reaching levels that I think might be attractive. 

Exactly how long this will last is anyone’s guess – things can turn around quickly in the stock market. That’s why I think doing more research and potentially seizing the opportunity right now could be a good idea.

The post 2 beaten-down dividend stocks to consider buying in May appeared first on The Motley Fool UK.

Big dividend yields can be attractive. But I think that there are some great opportunities in stocks that are increasing their dividends rapidly, even if the current yield isn’t that high.

The stocks

Two stocks on my list are Diploma (LSE:DPLM) and Starbucks (NASDAQ:SBUX). At first sight, neither is an obvious choice for income investors.

At today’s prices, Diploma has a dividend yield of 1.8%. Starbucks is only slightly higher, with a yield of 2.4%.

Those numbers don’t immediately jump out at me, as an investor. But both companies have been growing their dividends substantially, though. 

Over the last five years, Diploma’s dividend has increased by 16.5%. Starbucks has been increasing its dividend per share by an average of just over 15% per year.

If this continues, buying shares in either company today will yield significant returns in the future. The dividends might not be the most eye-catching today, but they will be after a few years.

Dividend growth

If Diploma continues to average 16.5% annual dividend growth, then a £1,000 investment will be distributing £83 per year 10 years from now. And that’s not all.

By reinvesting my dividends, I can boost my ownership in the company. If the stock grows at the same rate as the dividend, I’ll have 18% more shares a decade from now.

That could push my annual passive income up to £98 per year. On a £1,000 investment that’s an annual return of 9.8%.

Starbucks might be even more impressive. If the company continues to grow its dividend at 15%, then a £1,000 investment today will be generating £104 annually in dividends after 10 years.

On top of this, reinvesting my dividends at the same rate will boost my stake by 27% after a decade.

That means my investment could return £132 in annual passive income.

Risks and opportunities

I think that there are impressive returns on offer with both Diploma and Starbucks. But this depends on the underlying businesses increasing their dividends at the same rate, which is by no means guaranteed.

In the case of Diploma, a recession could be a significant headwind to the company’s organic growth. And a recession seems likely to me in the next couple of years.

Over the last decade, the number of Starbucks stores has roughly doubled. This has been key to the company’s growth, but I don’t think it’s realistic to expect that rate of expansion to continue.

In both cases, though, I think that the risks are mitigated by other factors. That’s why I think that these are two of the best dividend shares I could buy today.

With Diploma, a recession could actually bring some benefits. A substantial part of the company’s growth comes from acquiring other businesses, which could be easier in a recession.

Over the last five years, Starbucks has been reducing its share count at a rate of 4.5% per year. This is something that I expect to continue, making up for the slowing growth in the underlying business.

That’s why I think Diploma and Starbucks are some of the best dividend shares to buy today. I’ll be looking to buy both later in the month.

The post Are these dividend shares the best stocks to buy now? appeared first on The Motley Fool UK.

With £1,500 to invest, I’d be buying shares in Starbucks (NASDAQ:SBUX). I think that it would make a great addition to my portfolio right now.

Predictability

Buffett’s investment style involves looking for predictable business that will do well over time. It isn’t about trying to find stock that will double or triple within the next year.

Starbucks is exactly this type of company. With a dominant market position, growth is more likely to come steadily, rather than spectacularly. 

In my view, growth at Starbucks is likely to be driven by three things. The first is increased coffee consumption.

The US coffee market is forecast to grow at around 6% annually for the next few years. Since Starbucks has a dominant position in the US, I expect its sales and profits to benefit. 

Second, I expect the company to open new outlets, boosting its income. Buffett says that it’s best if a company doesn’t have to spend much cash to grow and I think this applies here.

Compared to other restaurants, Starbucks has relatively low costs associated with opening stores. This is because its outlets don’t need full kitchens and so have lower equipment costs.

Third, Starbucks has been buying back its own stock. As the number of shares decreases, the amount of the overall company’s earnings attributable to each share goes up.

Buffett has been effusive in his praise of Apple repurchasing shares. And over the last five years, Starbucks has reduced its share count from 1.47bn to 1.15bn.

The company paused its buyback programme earlier this year to invest in growth opportunities. But over time, I expect the number of Starbucks shares outstanding to decline.

Diversification

If I were investing £1,500 today, I’d be happy to invest it in Starbucks shares. I think that the stock has the hallmarks of a great Warren Buffett investment.

There’s a degree of risk that comes with investing the full £1,500 into a single stock. If I’ve misjudged the business, then I stand to see all of my investment underperform.

Importantly, though, I already have a fairly diversified set of investments. Buying £1,500 worth of stock in Starbucks would make the company around 2% of my portfolio.

I’m also invested in businesses like Aviva, Meta Platforms, and Southern Copper. As a result, adding Starbucks shares doesn’t leave me over-exposed to any particular region or sector.

If I didn’t already have other investments, I would be looking to invest part of the money and invest the rest elsewhere. But I don’t think 2% of my portfolio is excessive.

I’d therefore look to add Starbucks shares to my already diversified portfolio. I think it makes a lot of sense as someone looking to use the Warren Buffett method.

The post I’d invest £1,500 in this stock using the Warren Buffett method appeared first on The Motley Fool UK.

Strong demand and new projects

If I put the financials to one side to begin with, consumer demand should help to boost Starbucks shares. Despite the existing size of the business, it still managed to grow store sales by 17% during the quarter ending in early October. This was split between a 15% increase in transactions and 2% from the increased average ticket spend.

I think this goes some way to showing the resilience and longevity of Starbucks that should be carried over into next year and beyond. The business is still seeing growth and pursuing it. One metric that highlights this is that it opened 538 net new stores during the quarter. This puts the total store footprint at a record high of 33,833.

Added to this is the desire to push forward with new initiatives and not rest on previous successes. For example, it has launched a partnership with Amazon Go, enabling customers to go and pick up coffee in a store with no cashiers. This is still in a pilot phase at select locations, but it shows the vision for the future. If projects like this continue, then Starbucks should be able to stay relevant and not get stuck in the past.

Upside potential for Starbucks shares

As an investor, the above points are great, but I do also need to consider the finances. Fortunately, it’s good news here for Starbucks shares as well. For the full fiscal 2021 year, sales came in at $29.1bn, a growth of 24% year-on-year. This led to an improved earnings per share figure of $3.54, up $0.79 from the prior year.

One point I am a little disappointed on is the dividend yield, which sits at just 1.72%. As a mature business, I’d expect Starbucks to offer a much more generous dividend to keep long-term shareholders happy. In fact, if growth does stagnate in coming years, then the lack of a dividend could pose a real risk to the share price.

Another risk that’s worth mentioning is whether consumers will change their spending habits regarding coffee. The pandemic saw revenues drop substantially, as lockdowns forced people to make coffee at home. Although recent results suggest people are back in stores, buying coffee this way is much more expensive. If people start to become more conscious and brew coffee at home, it could hurt Starbucks.

Ultimately, I think the firm is performing very well right now. With new initiatives being rolled out, I think Starbucks shares could do well next year and so am considering buying shares.

The post Why I think buying Starbucks shares could be a smart move for 2022 appeared first on The Motley Fool UK.

Of course, stocks could pull back at any time. However, encouragingly, some experts believe the market could keep rising for a while. Wharton professor Jeremy Siegel, for example, believes stocks could keep rising until the US Federal Reserve moves to tighten rates. And he doesn’t believe that’s going to happen in the near term. “Enjoy this ride. It’s going to keep on going… toward the end of the year,” he told CNBC last week.

Here, I’m going to highlight three stocks I like for this bull market. I’d be happy to buy all three for my own portfolio today.

Diageo

One FTSE 100 stock I believe has the potential to keep climbing in this bull market is alcoholic drinks giant Diageo (LSE: DGE).

My investment case here is pretty simple. As the world reopens in the months ahead, people are likely to catch up with their friends and drink alcohol. As the owner of a wide range of top brands such as Tanqueray and Guinness, Diageo should benefit.

This isn’t just a short-term play, however. In the long run, Diageo looks well-placed to benefit from the ‘premiumisation’ trend. Increasingly, consumers are willing to pay more for higher-quality products.

Of course, if there are Covid-19 setbacks, my investment case may become obsolete. However, with the stock still more than 10% below its all-time highs, I think the long-term risk/reward proposition here is attractive.

Starbucks

Another stock I’d buy for this bull market is US-listed Starbucks (NASDAQ: SBUX). This is a stock star portfolio manager Terry Smith bought for his fund last year.

I think this company should do well as lockdowns are eased globally. People are going to want to catch up with their friends so Starbucks should benefit. “We are here for that great human reconnection,” CEO Kevin Johnson said recently. “Starbucks was built for this moment.”

However, Starbucks isn’t a cheap stock. Currently, it sports a forward-looking P/E ratio of about 40. This adds risk to the investment case. But I’m comfortable with the valuation as the company has historically been very profitable.

Smith & Nephew

Finally, I like Smith & Nephew (LSE: SN). This is a leading medical technology company specialising in joint replacements.

Smith & Nephew has had a tough year. That’s because during Covid-19 many elective medical procedures were postponed. However, I see this as a short-term setback. As vaccines are rolled out globally, elective procedures should pick up, boosting Smith & Nephew’s sales. This year, analysts expect sales to rise about 16%.

Looking further out, there’s an attractive growth story here. By 2030, it’s expected there’ll be 1.4bn people across the world aged 60 and over (versus less than 1bn now). This demographic shift should drive demand for joint replacements.

This stock could be volatile in the short term as Covid-19 cases fluctuate. In February, the company said there’s uncertainty regarding the timing and pace of the recovery.

However, I believe if I’m patient, I’ll be rewarded here. It’s worth noting that Barclays just raised its target price to 1,875p from 1,750p. That’s about 33% higher than the current share price.

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WASHINGTON, DC — At the end of this month, Starbucks  (NASDAQ: SBUX.US) is likely to post a result that will draw little attention, but is intriguing for its larger implications: The company will overtake McDonald’s  (NYSE: MCD.US) for the first time in pre-tax earnings in Japan.  McDonald’s, of course, has struggled in Japan recently. Its 50-owned Japanese subsidiary recently announced that it was closing 74 stores, or about 2.3% of its total store count, due to declining customer demand. Starbucks’ demand arc in Japan is quite another story — the company has gone from zero to more than 1,000 stores in less than 20 years. 

The two businesses’ trajectories in Japan are emblematic of a more global phenomenon. On nearly every continent, McDonald’s is struggling to maintain its growth momentum, while Starbuck’s has seemingly effortlessly posted a recent annual growth rate of 11.1%. McDonald’s is dealing with a number of factors crimping its revenues, the most prominent of which is a sea change in consumer preferences, for higher-quality, fast-casual establishments over quick-service chains like McDonald’s. Yet recently, the company has zeroed in on Starbucks as a threat to its business. Here’s Chief Operating Officer Tim Fenton during the company’s most recent earnings call, discussing the last quarter’s problems and mentioning Starbucks but not by name:

“… we lost some share based on our insights to non-traditional competitors, cafés, and bakeries.”

As Bloomberg reported a few days after this call, internally, McDonald’s has challenged its operators to protect its breakfast segment by winning what it deems a “coffee war” with Starbucks.

Will McDonald’s wrench significant amounts of market share from Starbucks with this new push? It’s doubtful. But CEO Donald Thompson understands that sometimes, to push forward a big strategic objective, you need to humanize the objective and create a villain that your troops can rally around to defeat.

The point of appearing to go to war

In this case, the strategic objective is simply to increase coffee-driven visits in the U.S., as such visits usually occur at breakfast, which accounts for 25% of company revenue. The strategy is likely informed by the chain’s recent experience in Canada. In 2008, career McDonald’s executive John Betts took over the company’s Canadian division. Along with upgrading McDonald’s Canadian locations to a more contemporary aesthetic, Betts implemented a plan to draw more Canadians into McDonald’s outlets with coffee, because Canada, similar to the U.S., is a coffee culture. 

Most notably, McDonald’s Canada began giving coffee away for free, first running this promotion in 2009. The emphasis on coffee won over skeptical Canadians, and since then, coffee sales in Canada have tripled, and breakfast has seen double-digit sales increases for the last five years. As Betts archly stated in 2012: “When you change someone’s coffee habit, you have got them.” 

In the U.S., McDonald’s can’t expect to triple its coffee sales in five years by giving away free coffee. When Starbucks was but a single crammed location in Pike Place Market in Seattle, and the company’s global footprint existed only as a network of neurons in Howard Shultz’s brain, McDonald’s provided by default the most widely available retail cup of coffee in the country. Today, the landscape has changed irrevocably. What McDonald’s can expect by pushing a “gold-standard cup of coffee with every visit” is to regain traction with wavering customers.

As CFO Pete Bensen stated during the company’s most recent earnings conference call, “If we lose relevance in coffee, then we are going to lose the transaction which yields food purchase.” In other words, if the company can direct more of the legions in need of a coffee fix through its arches during breakfast, the rest of the transaction will fall into place. It’s interesting how well Woody Allen’s famous quote that “80% of life is showing up” applies to a simple and well-reasoned corporate strategy like this one.

Toward this goal, McDonald’s has quietly laid the groundwork for increasing the quality, supply, and promotion of its coffee. Last year, the company announced that it was investing $6.5 million to assist more than 13,000 farmers in Guatemala and other South American countries, to scale up volume of high-grade arabica coffee beans, as well as to assist small-scale farmers with sustainable agricultural methods.

As for promotion, the company’s well-publicized push into packaged coffee through its new partnership with Kraft might be construed as an attempt to compete with Starbucks in the retail grocery venue, but it’s more immediately about heightening coffee brand perception. It is betting that U.S. incentives such as its “$1 any size coffee” at breakfast, coupled with McDonald’s-branded coffee in grocery stores, will keep its coffee top of mind versus Starbucks and other competitors. If increased business at breakfast eventually leads to additional sales of packaged coffee, as well as more non-breakfast visits, the company will take it as a bonus.

A reaction from Seattle

How is Starbucks responding to McDonald’s sudden pressure on the coffee front? By ramping up its new breakfast offerings, of course. This month, the company is introducing four new premium breakfast sandwiches, with enticing names including “Slow-Roasted Ham and Swiss” and “Vegetable & Fontiago.” Tearing off a sheet from the McDonald’s strategy notebook, Starbucks will offer a free Grande-sized brewed coffee with the purchase of a breakfast sandwich from March 12-14. Of course, Starbucks also has a larger strategy in mind, which is to generate a larger transaction per customer. Yet it speaks to the importance of the breakfast market that given a few more disappointing sales quarters from McDonald’s, or any sign of Starbucks’ vaunted growth slowing, and these two giants could be headed for confrontation after all.

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