Coffee stocks have been lucrative for investors. For instance, Starbucks (SBUX) has made millionaires since its initial public offering (IPO). The company had an IPO in 1992, and $10,000 invested then is worth more than $4 million now without reinvesting the dividend.
However, Starbucks is not the only choice for investors. Today, there are many coffee stocks to choose from, including retailers, processors, and distributors. A few companies are focused mainly on coffee, like Starbucks. Other coffee companies have a business segment in a more extensive product portfolio, like Keurig Dr. Pepper (KDP). Finally, some companies produce and sell coffee as part of a giant conglomerate, like Nestle (NSRGY).
There is room for many companies in this $100 billion industry driven by consumers drinking 500+ billion cups of coffee annually. A handful of publicly traded companies make excellent investments at the appropriate valuation. In addition, there are several smaller coffee stocks. However, investors should be wary of many of these since they are often micro-caps with more significant risks and volatility. Lastly, there are many, many privately-held coffee companies. For instance, Dunkin’ Donuts is now owned by a private equity firm.
In this article, we discuss publicly traded coffee stocks with dividends.
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Coffee Stocks with Dividends
Starbucks
Starbucks was founded in 1971 in Seattle, WA, as a coffee bean store. Howard Schultz bought the company in 1987, rebranded his stores, and started to expand. Starbucks had an IPO in 1992. Today, Starbucks has about 34,317 stores and operates globally. Approximately 61% of stores are in the US and China, and Starbucks operates about 51% of the stores, and 49% are licensed.
Today, Starbucks sells coffee beans, ground coffee, coffee, coffee-based drinks, other drinks, pastries, breakfast food, and lunch food at its retail stores and licensed stores. The company also sells coffee beans and ground coffee at grocery stores through a partnership with Nestlé.
Significant brands are Starbucks, Teavana, Seattle’s Best Coffee, Evolution Fresh, Ethos, Starbucks Reserve, and Principi. The Starbucks brand is the No. 51 most valuable global brand.
Total revenue was around $29,061 million in the fiscal year 2021 and about $30,362 million in the last twelve months.
Starbucks sells the most coffee in the US and is thus the pre-eminent coffee stock. The company took an everyday drink and made it trendy and desirable. The combination of higher quality and attractive retail outlets allowed Starbucks to charge a premium for its coffee.
Starbucks paid its first dividend in 2010, and it has been raised yearly, making the stock a Dividend Contender. According to Portfolio Insight*, The forward dividend rate is $1.96 per share, giving a forward dividend yield of about 2.4%. This yield is above the 5-year average dividend yield of 1.93%. In addition, the dividend growth rate has been 16.7% in the past 5-years and 20.72% in the past decade.
The dividend is safe, too, with a payout ratio of approximately 57%. Free cash flow (FCF) was $3,857.5 million and more than covers the dividend requirement of $2,166.8 million. These amounts give a dividend-to-FCF ratio of ~56%. Starbucks has a BBB+ / Baa1 lower-medium investment-grade credit rating.
Starbucks is trading at a forward price-to-earnings (P/E) ratio of ~24.5X, below its average range in the past 10-years.
Keurig Dr. Pepper
Keurig Dr. Pepper is not as well-known as Starbucks as a coffee stock. However, it is a significant player in the single-serve market. The company sells the Keurig single-serve coffee machines and K-Cup pods, which are very popular. Besides the two coffee brands of Keurig and Green Mountain, KDP owns Core, Dr. Pepper, Sunkist, Canada Dry, Bai, 7UP, Snapple Mott’s, Hawaiian Punch, and several others.
KDP resulted from the acquisition of Dr. Pepper Snapple by Keurig Green Mountain, owned by JAB Holdings, for almost $20 billion in 2018. The new company became the third largest non-alcoholic beverage company in the US. Privately held JAB Holdings owns ~33.4%, and Mondelez (MDZ) owns ~5.3%. JAB Holdings also owns Peet’s Coffee, Caribou Coffee, Panera, a few other food chains that sell coffee, and the international rights to Maxwell House. However, the firm is not publicly traded on stock exchanges, and thus cannot be considered a coffee stock to buy.
Total revenue was around $12,683 million in 2021 and the last twelve months.
KDP does not have a long dividend history, although some of its predecessor companies do. The company has paid a dividend since 2019. The forward dividend yield is now ~1.99% based on a dividend rate of $0.75 per share. The 3-year dividend growth rate is about 65%.
The dividend safety metrics are conservative, with a payout ratio of approximately 42%. Free cash flow of ~$2,451 million was greater than the annual dividend outflow of $955 million, giving a dividend-to-FCF ratio of ~39%. KDP has a Baa1 lower-medium investment-grade credit rating.
KDP is trading at a forward P/E ratio of ~22.4X, below its average in the past 3-years.
McDonald’s
The following coffee stock we discuss is McDonald’s (MCD). The company is well-known for its burgers and nuggets, but it is a major player in coffee. The Golden Arches reportedly sells more than one billion cups of coffee annually. Additionally, the company owns McCafé, a chain of coffee houses with more than 1,300 retail locations globally.
Besides McCafé, the company sells coffee in its 40,000+ McDonald’s stores worldwide. According to Interbrand, the McDonald’s brand is the ninth most valuable brand globally. The combination of McCafé and McDonald’s stores means the company is a significant coffee stock.
Total revenue was around $23,221 million in 2021 and the last twelve months. Systemwide sales were $112 billion in 2021. Approximately 60% of revenue is from franchise royalty fees and lease payments. McDonald’s owns 55% of the real estate and 80% of the buildings in its franchise system.
McDonald’s is known as a Dividend Aristocrat and Dividend Champion. The company has raised the dividend for 47 consecutive years. The forward dividend rate is $5.52 per share, and the dividend yield is 2.2%. This yield is below the 5-year average dividend yield of 2.39%. The dividend growth rate has been 7.78% in the past 5-years and 7.51% in the past decade.
The dividend is safe, too, with a payout ratio of approximately 56%. Free cash flow was $7,101.5 million and more than covers the dividend requirement of $3,918.6 million. These values give a dividend-to-FCF ratio of ~55%. McDonald’s has a BBB+ / Baa1 lower-medium investment-grade credit rating.
McDonald’s is trading at a forward P/E ratio of ~25.3X, within its average range in the past 10-years.
J. M. Smucker
We now switch focus to a company known for its jams and jellies, J. M. Smucker (SJM). The 100+ year-old company still sells jams and jellies but has transformed itself into a seller of pet food (36% of revenue) and coffee (33% of revenue) through a series of acquisitions and divestments. The remainder of total revenue is from peanut butter (10%), fruit spreads (5%), and frozen hand-held foods (5%).
Major coffee brands include Folgers, Café Bustelo, Dunkin’ Donuts, and 1850. Smuckers also owns Jif, Smucker’s, Crisco, Smucker’s Uncrustables, Meow Mix, Kibbles ‘n Bits, 9Lives, Nature’s Recipe, Milk-Bone, Pup-Peroni, Rachael Ray Nutrish, Natural Balance, Robin Hood, and Five Roses.
Total revenue was around $8,003 million in 2021 and about $7,885 million in the last twelve months.
Smucker is another dividend growth stock on this list of coffee stocks. The company has raised its dividend for 25 years, making it a Dividend Champion. The forward dividend rate is $3.96 per share, and the dividend yield is 2.85%. The dividend growth rate has been 5.89% in the past 5-years and 7.47% in the past decade.
The dividend is safe, too, with a payout ratio of nearly 42%. Free cash flow was about $681 million and more than covers the annual dividend payment of $409.5 million. These values give a dividend-to-FCF ratio of ~60%. Smucker has a BBB / Baa2 lower-medium investment-grade credit rating.
Smucker is trading at a forward P/E ratio of ~19.9X, above its average range in the past 10-years.
Restaurant Brands International
The next coffee stock is Restaurant Brands International (QSR). The company results from several acquisitions and mergers orchestrated by the private equity firm 3G Capital, which owns 30%. Today, the company owns Tim Hortons, Burger King, Popeyes Louisiana Kitchen, and Firehouse Subs. QSR has 29,000+ locations in 10 countries.
It is the Tim Hortons brand that makes QSR a coffee stock. The brand is omnipresent in Canada and sells coffee, donuts, and fast food. Tim Hortons sells even more coffee than Starbucks in Canada and has a 54% market share of branded coffee.
Total revenue was around $5,739 million in 2021 and the last twelve months.
QSR has an excellent forward dividend yield of ~3.66%. The forward dividend rate is $2.16 per share. The dividend has been increased for ten straight years. The dividend growth rate has been 27.88% in the past 5-years.
The dividend safety metrics are concerning, though. First, the payout ratio is high at about 75%. However, FCF was about $1,620 million and more than covers the dividend payment of $974 million, with a dividend-to-FCF ratio of ~60%.
Investors should be cautious of the significant amount of debt on the balance sheet with a 6.44X leverage ratio and low interest coverage. QSR has a BB non-investment grade credit rating.
QSR is trading at a forward P/E ratio of ~19.7X, within its average range in the past 10-years.
Kraft Heinz
Kraft Heinz is a company known by almost every consumer for cheese, ketchup, and mustard. In addition, Kraft Heinz is a coffee stock. Kraft Heinz owns the US rights to Maxwell House. JAB Holdings, another coffee stock, has international rights to Maxwell House. The company also owns Gevalia and Ethical Bean Coffee.
Besides coffee, Kraft Heinz owns many well-known brands, including Kraft, Heinz, Oscar Meyer, Velveeta, Philadelphia, Lunchables, Cracker Barrel, Jell-O, Kool-Aid, etc.
Interestingly, Kraft Heinz is the second company controlled by 3G Capital on this list. However, according to Warren Buffett’s annual shareholder letter, Berkshire Hathaway (BRK.A, BRK.B) owns about 26.6% of the Kraft Heinz carried at a $13.1 billion valuation. In addition, 3G Capital has been selling shares since 2016 and now owns about 15% of the food company, down from ~24% in 2016.
Total revenue was around $26,042 million in 2021 and the last twelve months.
Kraft Heinz has the highest dividend yield of the coffee stocks at 3.88%. However, the forward dividend rate is $1.60 per share, held constant since 2019 after being cut from $2.50 per share. This fact makes the dividend growth rate negative for the trailing 3-years and 5-years.
However, the lower dividend rate has improved the dividend safety metrics. The payout ratio is now about 55%. The FCF was about $3,405 million and covers the annual dividend payment of $1,959 million, with a dividend-to-FCF ratio of roughly 58%.
The dividend was cut to allow Kraft Heinz to deleverage. The total debt has fallen, but the leverage ratio is still ~2.5X, and interest coverage is very low. The company has a BBB-/Baa3 lower-medium investment-grade credit rating, one notch above non-investment grade.
Kraft Heinz is trading at a forward P/E ratio of ~15.7X, above its average range in the past 10-years.
Nestlé S.A. ADR
The last coffee stock we discuss is Nestlé S.A. ADR (NSRGY), the European food giant. The company is the largest coffee stock by revenue and market capitalization on this list. Nestlé operates in 189 countries.
Nestlé was founded in 1866. Today, it is the largest global consumer staples company in the world. The company is known for its candy brands, baby foods, bottled water, cereals, ice cream, etc. The conglomerate also owns about 24% of L’Oréal.
In addition, the company is a major player in coffee, owning Nescafé, Nespresso, Dolce Gusto, Starbucks (licensed for sale at grocery stores and other retail outlets), and Blue Bottle. Nescafé has an 80-year history, and Nespresso is single-serve coffee.
Total revenue was around $87,470 million in 2021 and the last twelve months.
Nestlé’s forward dividend rate is $3.04 per share giving a dividend yield of 2.3%. Like many European companies, Nestlé pays a dividend annually and has done so since at least 1959. The dividend has trended up with time, but not consistently.
The payout ratio is approximately 60%, but it fluctuates yearly. The FCF was $8,984 million in 2021 and covered the dividend requirement of $7,681 million. Nestlé’s balance sheet is conservative with an AA- / Aa2 high-grade investment credit rating.
Nestlé is trading at a forward P/E ratio of ~26.4X, above its average range in the past 10-years. According to StockRover*, the stock has a low beta of 0.42 relative to the SP 500 Index, making it a good counterweight.
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Final Thoughts on Invest in Coffee Stocks
Coffee stocks have proven lucrative to many investors. Both Starbucks and McDonald’s are leaders in retail sales and return cash to investors and increase their dividends annually. Investors should also take a deeper look at KDP and Nestlé; both are market leaders in the single-serve market. Other coffee stocks are somewhat less desirable but could be a good buy at the proper valuation and lower total debt.
Thanks for reading Invest in Coffee Stocks!
Disclosure: Long SBUX, KDP, and MCD
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Published at Fri, 15 Apr 2022 04:00:00 -0700
