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Companies with Buybacks: SBUX Edition

November 20, 2011 | About:
Chandan Dubey

Chandan Dubey

99 followers


This article is fourth in the series of articles about share buybacks and whether the company doing them is returning value to share holders. The previous articles can be found here.

Companies With Buybacks: ISRG Edition

Companies with Buybacks: AMAT Edition

Companies with Buybacks: LOGI Edition

Today I want to talk about another steller performer: Starbucks (SBUX). On Nov 04, 2011 Starbucks reported its 4Q results which by any metric are stellar. Global same store sales growth increased by 9% and the EPS by 27%. Furthermore,

  • The Board of Directors declared a cash dividend of $0.17 per share, a 31% increase from $0.13 per share
  • The Board also authorized the repurchase of up to an additional 20 million shares of the company's common stock. This authorization is in addition to approximately 4.4 million shares that remain available for repurchase under previous authorizations.


At the current price of $42/share, this represents $840 million repurchase plan.

Executive Compensation Long-term performance-based compensation for executive officers was comprised of 50% stock option awards and 50% performance RSUs.
  1. The management (group of 5 people) received $10m in stock options.
  2. They received approximately $15 million in equity (restricted stock units).
  3. The 3 year average burn rate is 3.17% (dilution due to grants and compensation as a percentage of shares outstanding).
I am not a fan of options. They give management all the upside but no downside, when the shareholders suffer.

Management Let us look at some of the metric that rates the management.

2001200220032004200520062007200820092010
FCF76.61M102.2M209.2M407.67M279.6M360.4M250.8M274.2M943.4M1.26B
divided by
Invested Capital1.19B1.35B1.77B1.89B1.98B2.04B2.75B3.16B3.33B3.16B
Cash ROIC6.5%7.5%11.8%21.6%14.1%17.7%9.12%8.7%28.3%40.0%


As we see, management has been excellent in using invested capital to generate good FCF. On an average Starbucks has generated $20.7 for every $100 invested.

Balance sheet The following are the relevant items from the fiscal year 2011.

Item (in $ million)20112010
Cash1,148.11,164.0
Total current assets3,794.92,756.4
Goodwil321.6262.4
TOTAL ASSETS7,360.46,385.9
Total current liabilities2,075.81,779.1
Long-term debt549.5549.4
Total liabilities2,973.12,703.6
Total equity4,387.33,682.3


The balance sheet is in a tip-top shape. Starbucks has enough cash to pay all its long term debts and enough current assets to pay all it liabilities and still have $1 billion left-over.

Dividend and Buybacks Starbucks has some history of share buybacks.

20012002200320042005200620072008200920102011
Shares Outstanding788.7M795.05M803.30M822.93M815.42M792.56M770.09M741.70M745.90M764.20M769.7M
Stock Bought Back--0.80%-1.03%-2.39%0.92%2.88%2.92%3.83%-0.56%-2.39%-0.72%


Starbucks started paying dividend in 2010. The payout was 0.23/share. In 2011, it has paid $0.52/share.

Valuation

P/E27.6
P/B7.2
P/S2.8
P/CF22.2
Yield1.3%
PEG1.1
FCF (2010)1.26B


The 5 year forecasted growth is is 17.6% and in the last 5 years the EPS has grown at a rate of 15% and revenue at 11%.

The company sells for $42/share. What is the growth that is priced in ? With a 15% discount rate, and 3% terminal growth rate, the priced in growth rate is 29.72% for the next 10 years.

Conclusion

Let me conclude after summarizing what we found out in the article.
  • Starbucks is a company with good management. For every $100 invested, it has generated $20.77.
  • The compensation policy results in an average burn rate (dilution of outstanding shares) of around 3%. At the current price of $42/share ($31 billion market cap), this is a $1 billion proposition
  • Previously, Starbucks has bought shares during 2005-2008 but the dilution due to compensation has resulted in only 2.4% decline in the last decade. Although the buybacks were quite a bit more (see table above).
  • The current buyback announcement of $840 million buyback will barely cover the 3% expected dilution of stock due to compensation. So, the shareholders will get no benefit from the buyback but will lose the $820 million cash from the balance sheet. To me this seems like a profligate waste of the shareholder money.
  • Starbucks is not cheap. The market is assuming a growth of nearly double of what Starbucks has achieved in the last 5 years (using a 15% discount rate). This is a terrible time to buy shares.


I would rather have the dividend.

Additional disclosure: I own no shares of Starbucks (SBUX) and am not planning to buy any at the moment.

About the author:

Chandan Dubey
I invest because I want to be free by the time I reach 40 years of age i.e., 2025. My investment style is to find a small number of bets with large margins of safety. I pay a lot of attention to management and their incentive. Ideally, I like to buy owner operator businesses. I am fortunate to have a strong inclination towards studying. I aid my financial understanding by extensive reading in psychology, economic, social sciences etc.

Rating: 3.4/5 (14 votes)

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