DGI Adventure 06-20-16 Sold Cash Secured Put + Investment Thesis – Starbucks Corporation (SBUX) – $52.50 strike – July 15 Expiration

This trade was actually executed on Thursday 06/16/16. I didn’t get a chance to write about it until today.

Please visit the core philosophies article on my investment thesis process for a deeper explanation of the components of this article.

Dividend Cycle

SBUX will go ex-dividend in early August, and I would expect the payout to be $0.20/share which is what it’s been the last three quarters. Starbucks is a dividend challenger, having raised its payout for 6 consecutive years. They’ve historically raised the dividend in November, so they’re still due for an increase this year. This option will expire before the ex-dividend

Investment

The QC (Quantitative Case)

SPL (Strike Price Logic)

This was kind of about maximum downside protection and still getting a decent premium. The strike price happens to represent a 1.5% yield, but I don’t care too much about that, since the premiums are much higher than dividend payouts. $55.00 actually seems like the short term support level to me. That was too close to the money for my taste.

If I can pick up shares at $52.50, it means it will have broken that support and it will feel like a bargain based on the last year of share price action:

SBUX 1 year chart – Courtesy Yahoo Finance

QWaF (Qualitative Warm and Fuzzy)

I spend a lot of time at Starbucks. I’m in sales, and when I need a place to stop and use WiFi for a while, I can count on a Starbucks being somewhere near by. I know what’s on the menu, and I can use my phone to pay for my drink. I load my account with $50.00 at a time to simplify my expense report process. I’m one of those people that spend less than $3.00 per visit and sit for a long time…sometimes hours. They don’t make a lot of money on me. But as I sit there I can see how many people come through and buy $5 froo froo drinks + froo froo sandwiches and pastries. They’ve raised prices this year (my standard venti iced tea order went from $2.65 to $2.85…$2.95 in some locations). Yes…I gave up coffee 4 years ago, and I still go to Starbucks several times per week!

The new rewards program is structured to encourage higher dollar tickets per visit. They’re starting to sell booze in the evenings at select locations, and they’re moving into China. I think there is plenty of growth on the horizon such that maintaining an 8%+ dividend growth rate should be no problem.

CPR (Cold and Prickly Risks)

There is a reason that SBUX’s 5 year average PE is over 300, but is currently only in the low 30s now. At some point, every successful “growth” stock, becomes an established, boring company that isn’t lighting the world on fire anymore. That is happening with Starbucks and it is not an easy transition to make. What will the growth be going forward? There is literally a store on every corner. How oversaturated is the market? It is unrealistic to expect a continuation of the 40% 10 year EPS CAGR. So what kind of CAGR should we expect? TTM free cash flow/share is ~$1.76, which represents a 3.4% “cash flow yield” at my strike price. Using a 10% discount rate, that means the strike price is “fair” so long as they can maintain a 6.6% FCF growth rate. I’m going to say that’s pretty doable, and I collect options premium in the meantime. Woo hoo!

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