Starbucks versus Nike: Dividend Growth Comparison

SBUX vs NKE

Dividend growth investors must often decide which stock to purchase with new money. This holds true whether starting a new position or adding to an existing position. This decision is not always straightforward. But dividend growth investors should at least take a look at dividend safety and valuation. In this analysis, I make a head-to-head comparison of Starbucks Corporation NASDAQ:SBUX and Nike Inc NYSE:NKE, two very popular growth stocks that also pay a rising dividend.

Overview of Starbucks

Starbucks traces its history to one store in Seattle in 1971. Today, Starbucks operates around 31,256 stores globally (at the end of Q4 FY2019). The company’s business model is focused on selling coffee at company-operated stores (80% of revenue). But it also has licensed stores (~11% of revenue) and sells products through licensing of its brand (~9% of revenue). The company sells coffee, teas, cold-blended beverages, food, and other items at its stores. Starbucks also sells coffee, tea, and food at its own stores and grocery stores and warehouse clubs through its Global Coffee Alliance with Nestle S.A. (NSRGY). It also sells bottled beverages, ice creams, and other items in partnership with PepsiCo, Inc. (PEP) and other companies. Although Starbucks operates globally, the Americas provide the most revenue at 69% of total revenue, 20% of total revenue is from China/Asia-Pacific, and 11% of total revenue is from EMEA. Starbucks is considered one of the top 100 brands in the world at No. 48 by Interbrand.

Investment Data

Overview of Nike

Nike was founded in 1964 in Oregon. The company designs, develops, markets, and sells athletic footwear, apparel, equipment, and accessories worldwide. Nike’s main brands include Nike, Jordan, Converse, and Hurley. Nike is a global powerhouse and is the largest athletic footwear and apparel company in the world. The company ships products to more than 30,000 retailers in more than 190 countries. Nike operates 1,200 stores (one-third in the U.S.) and has another ~6,000 franchised stores globally. Nike is considered one of the top 100 brands in the world at No. 16 by Interbrand. The company maintains its brand strength through continuous endorsements of top athletes and teams.

Investment Data

Dividend Safety Comparison for Starbucks and Nike

Both Starbucks and Nike pay a growing dividend. Starbucks is a Dividend Achiever having now raised the dividend for 10 consecutive years. The forward yield is ~1.9% and is currently safe based on earnings, free cash flow, and debt. The current forward payout ratio is approximately 53.8% based on a dividend of $1.64 per share and consensus 2020 EPS of $3.05. This is a good ratio and below my threshold of 65%. From the perspective of free cash flow, operating cash flow was $5,047M in fiscal 2019 and capital expenditures were $1,807M giving free cash flow of $3,240M. The dividend required about $1,761M giving a dividend-to-FCF ratio of ~54.4%. This is a good value and below my criteria of 70%. I also do not find total debt to be worrisome from the perspective of dividend safety. At the end of Q4 FY2019, the company had no short-term debt and $11,169.6M in long-term debt offset by $2,757.1M in cash, cash equivalents, and investments. The company’s leverage ratio is ~1.6X and interest coverage is ~12X, meaning that Starbucks can pay its obligations.

Nike is also a Dividend Achiever have raised the dividend for 18 consecutive years. The forward yield is ~0.96%. The dividend has excellent safety based on earnings, free cash flow, and debt. The forward payout ratio is approximately 32.4% based on a dividend of $0.98 per share and consensus 2020 EPS of $3.02. This is an excellent value from the perspective of dividend safety and well within my threshold of 65%. From the perspective of free cash flow, operating cash flow was $5,903M in fiscal 2019 and capital expenditures were $1,119M giving free cash flow of $4,784M. The dividend required about $1,332M giving a dividend-to-FCF ratio of 27.8%. This is an excellent value and well below my criteria of 70%. Debt is almost a non-issue for Nike. At the end of Q2 FY2020, the company had only $306M in short-term debt and $3,462M in long-term debt offset by $3,502M in cash, cash equivalents, and investments. The company’s leverage ratio is ~0.6X and interest coverage is over 100X, meaning that Nike’s balance sheet is very conservative.

Selected Dividend Growth and Safety Metrics

wdt_IDCompanyDividend YieldYears of Div. GrowthPayout RatioDividend to FCF Ratio
1Starbucks1.901053.8054.40
5Nike0.961832.4027.80

Source: Dividend Power based on data from Seeking Alpha and TIKR

Valuation Comparison for Starbucks and Nike

The main concern in making an investment in Starbucks or Nike at this juncture is valuation. Starbucks is trading at a forward price-to-earnings ratio of ~28.9 based on consensus fiscal 2020 earnings of $3.05. Nike is trading at an even higher P/E ratio of ~33.6 based on consensus fiscal 2020 earnings of $3.02. Both stocks are trading at high valuations based on earnings multiples relative to historical valuations and the broader market. The current average P/E ratio for the S&P 500 is ~24.3. This is higher than the trailing mean of ~15.8 and median of ~14.8. Starbucks trailing 10-year earnings multiple is roughly 26.0 and that of Nike is about 23.0. At current stock prices, the valuations of both stocks exceed the trailing multiples. The risk from such high multiples is that they revert to the mean. But with that said both companies are growing the top and bottom lines rapidly right now.

Final Thoughts on Starbucks and Nike

Nike’s valuation is currently sky high at over 30 times earnings and trading near its 52-week and all-time high. On the other hand, Starbucks is trading at about 10% below its 52-week and all-time high. For investors looking to start a new position I would wait for a better entry point. For existing shareholders, Starbucks has the lower valuation and higher yield at the moment. Hence, it is a better candidate for adding to an existing position.

BIO: Dividend Power is a blogger on dividend growth stocks and personal finance. He also works as a part-time independent equity research analyst with a leading newsletter on dividend stocks. Dividend Power also provides analyses on Seeking Alpha. He is currently in the top 10% out of over 7,100 financial bloggers as tracked by TipRanks (an independent analyst tracking site).

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