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Simon’s June Outlook: “Great Capital Allocators”

June 22, 2020

Steady and predictable businesses are a thing of beauty for investors. Their recurring and predictable cash flows can be counted on, giving management plenty of options on how to reward long-term shareholders.

Starbucks (Nasdaq: SBUX) is exactly that type of ultra-stable business. Its 32,000 consumer-facing locations continue to brew up coffee for consumers and profits for investors every morning. Incremental improvements like mobile payments are driving more people through its lines, while a prepaid balance of $1 billion in Starbucks gift cards is just waiting to be deployed.

The company doubled-down on its stores in May 2018, when it sold the rights to its consumer-packaged goods channel (i.e. packaged coffee sold in grocery stores) to Nestle for $7 billion. Rather than using that royalty payment to build even more locations, Starbucks deployed it on an aggressive stock repurchase and dividend program. As stated in its initial announcement, the company “expects to return approximately $20 billion in cash to shareholders in the form of share buybacks and dividends through fiscal year 2020.”

Starbucks has held true to its promise, paying $3.5 billion in dividends and buying back a net $49 billion of shares in fiscal 2018 and 2019. Its outstanding share count has decreased 15% since the end of fiscal 2017, which has caffeinated shareholder returns. Even with the negative impacts of the pandemic, SBUX shares are up 29% during the past two years.

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