If you are looking for something to replace the declining McDonald’s (NYSE: MCD) in your portfolio, consider Starbucks (NASDAQ: SBUX). America’s favorite coffee shop has reported revenue growth for the last 34 quarters; since September 2011, according to ycharts.
Starbucks reported revenues of $20.52 billion on June 30, 2016; just one year earlier it reported $18.43 billion in revenues. That adds up to $2.09 billion in revenue growth in year at a time when competitors like McDonald’s are struggling to maintain their market share.
Like McDonald’s, Starbucks has become a great American brand; it is now part of the landscape in almost US city and town. More importantly, the coffee emporium is one of those consumer staples that makes for a great investment. It continues to deliver steady revenue growth despite a sluggish economy and declining middle class incomes.
Why you Need Starbucks in your Portfolio
The reason you need Starbucks in your portfolio, is that it is one consumer discretionary brand that is not losing its value. At a time when other consumer staples like Proctor & Gamble (NYSE: PG) and McDonald’s are in decline, Starbucks is growing.
The latest financial numbers; those from June 30, 2016, indicate that it is also paying off for investors. Some of the highlights of that payoff include:
- A dividend yield of 1.31%.
- A profit margin of 14.4%
- A net income of $2.669 billion.
- A diluted earnings per share number of 1.79
- A return on equity of 46.88%.
Not bad for a company in a sector where many brands like Wendy’s (NYSE: WEN) are slowly dying off. More importantly, Starbucks is actually making a lot of money from that growth.
Starbucks is making Money
For the second quarter of 2016 it reported the following numbers.
- $2.316 billion in cash and short-term investments.
- $13.83 billion in assets.
- $4.237 billion in cash from operations.
- A free cash flow of $719.9 million.
Naturally a lot of people will wonder how Starbucks does it. Why does the coffee shop operator keep growing and making money as traditional fast food operators fall by the wayside?
Starbucks is the Perfect Consumer Discretionary Stock for Today
The answer is that Starbucks is the perfect consumer discretionary stock for today’s America. It sells a relatively low cost luxury product in a nation mired in income inequality and wage stagnation.
Basically Starbucks’ coffee is expensive enough to be a luxury, but not too pricey for most people to afford. A middle class worker who has not seen a pay raise in years can feel sort of wealthy; by spending $4 to $5 for a latte or $2 for a cup of coffee.
That’s an important consideration in a country where 80% of American workers have not seen a wage increase since 2007, the Economic Policy Institute (the EPI) reported. The EPI also reported that wages for most Americans in 2014 were lower than they had been in 2009.
Americans might no longer be able to afford a new car or to go out to dinner but they can afford a Starbucks coffee. Under those conditions, such a coffee might be only luxury that they can afford.
Can this last, or will Starbucks start declining at some point. The ongoing revenue collapse at McDonald’s shows us just how far a once mighty food and beverage brand can fall in a very short time. Could the same thing happen at Starbucks at some point?
Only time will tell, for now America and the world seem to love Starbucks and its products. That love affair should be reason enough for you to consider adding Starbucks to your portfolio. It is one of the few consumer brands left with serious growth potential.
So if you’re looking for a growth stock with momentum; check out Starbucks. If you are out and about on a hot day, consider buying a Starbucks’ ice tea it’s great.