Dividend Purchase: Starbucks vs. Coca-Cola Showdown

In continuing our search for the Best Dividend Stocks, we will welcome the showdown between Starbucks ($SBUX) vs. Coke ($KO).  I was initially torn as to which stock to add to my portfolio.

In both stocks, you have household name brands, you have solid moats that are hard (if not impossible) to duplicate, and both companies are on good financial foundations.

Which did I choose to initiate a position in?  Read on for my analysis and answer to the question!

$SBUX Analysis

The Why

Starbucks is not the type of stock that I usually research mainly due to their newness in payment of dividends as they have paid out for only 9 years – I typically look for 20+ year dividend payers.

When I began to dig into the company, I liked what I saw:

  • A solid financial position.  A quick glance at the financials shows a net profit, low debt/equity, and positive cash flow from operations.
  • Global brand recognition.  Think Coffee = Think Starbucks.  This is the type of brand awareness that empires are built on.
  • Growing Coffee Industry.  Coffee companies appeal to me.  They are seemingly similar to microbreweries in the sense that a new one pops up every day.  This is a great sign for years to come for the coffee industry as it speaks to the current solid demand for a ‘cup of joe’.

$SBUX: The Numbers

Now that the stock met the why test, it was time to dig deep into the numbers.  Before looking into inputting the numbers in my spreadsheet – what I call ‘the spread’ – I did a quick, high level glance and $SBUX past three years of financials.

I liked what I saw – revenue growth, positive cash flow, positive earnings, strong working capital.  This justified me completing ‘the spread’:

RV Single Line Analysis
Company NameStarbucks
Company TickerSBUX
Prices As of7/17/2018
Market Price$51.34
Sunday, April 1, 20186 mos.
High Level #s
P/E Ratio16.2
Working Capital$470,000,000
Working Capital Ratio1.09

There are a few takeaways from this analysis:

    • Debt is a bit higher than I usually like to see.  I typically like a ratio at or close to 1.
    • Working capital is positive, which is always a plus in my book.
    • 16.2 P/E ratio is acceptable.  Under 20 is ideal.
    • MC/Equity is high at 15x.  This tells me the market has already built in quite the valuation in $SBUX as it is trading 15x its equity at the moment.

$SBUX hit four out of five criteria on my Dividend Checklist:

Dividend Checklist
xPositive Cash Flow
xAble to cover dividends through cash flow
xPositive working capital past three years
xGrowing industry
NoDebt/Equity close to or under 1

$KO Analysis

The Why

Coca-Cola has been a dividend paying stock for 56 years and is relatively well valued at $43/share at the time of my DRIP analysis.  At a $5,000 price point, I could be a proud owner of 114 shares in this wonderful company.

Coke also has an incredible moat with probably the world’s most iconic brand awareness.  It is a great stock to own.

$KO: The Numbers

With $KO passing the why test, it was time to spread the numbers.  I am sad to say that I did not get very far in this analysis.  Here were my takeaways:

Falling Revenues

A high-level overview of Coke’s numbers spoke to a trend I did not like to see.  Five consecutive years of falling revenues: $46B in 2013 to $35B in 2017.

Declining Cash Flow From Operations

To make sure I really understood the numbers, I went over to the CFFO statement as well.

The same picture emerged here: three straight years of declining cash flow from operations.  At $7B, this still managed to cover the dividends of $6.3B, but with the general societal trend of less pop being consumed, I wonder if this will continue to be the norm instead of an anomaly.

$KO Analysis Summary

While Coke is still a force to be reckoned with, it speaks to me of a larger issue with soda and its future in the world’s diet.

Unless Coke can diversify away from its most iconic brand or change the purchasing trend back towards soda, the dividend may be at risk in future years to come.

What Did I Buy?

$SBUX is not a perfect stock but it fit my criteria at the present moment.  The chance to own one of the world’s most popular and iconic coffee brands was too much to pass up.

I initiated a position on July 17th, scooping up 98 shares and adding $117.60 to my yearly dividend income.  I will put this on my list of Best Dividend Stocks for 2018.

Now, there are still issues with the company such as Howard Schultz’s departure as Executive Chairman and the lingering problems with the recent racial bathroom bias but overall I think this company is still on solid footing.

Long story short: I’ll take my chances with $SBUX on DRIP.


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