How to Make Money Off Of America's Drug of Choice

Starbucks, Dunkin' Donuts, and McDonald's are three of the largest dealers of 1,3,7-trimethylxanthin (a.k.a. caffeine). Which corner coffee dealer will keep you up at night but let your portfolio rest easy?

Jan 3, 2014 at 4:00PM

The nation's drug of choice is available on every street corner. Starbucks (NASDAQ:SBUX), Dunkin' Brands (NASDAQ:DNKN), and McDonald's (NYSE:MCD) are the three biggest purveyors of 1,3,7-trimethylxanthin (caffeine) at a retail level, the key ingredient in coffee. But which one of these companies is caffeine-fueled for most upside?

Joe jolts us all
Americans love a good cup of joe. We are the largest consumers of coffee globally. Of those over the age of consent, 83% drink at least one cup of coffee daily... and that number is up 5% from a year ago. Of those coffee drinkers, over a third drink specialty coffees, lattes, cappuccinos, mochas, and similar coffee drinks. Worldwide, caffeine is the preferred psychoactive drug.

Caffeine Chemical Illustration

Source: Wikipedia

Caffeine has some astounding properties. Drinking it makes the drinker more persuadable, according to a 2005 study published in the Journal of Applied Social Psychology. This means that it's smart to pick up a box of Dunkin' for your Power Point audience. Caffeine has been shown to improve athletic performance, to the point that athletes are tested for signs of abuse.

Starbucks' designer drug
In 2010, Starbucks sold an estimated 3.9 billion cups of coffee based on net revenue of $10.7 billion. With fiscal 2012 net revenue of $13.3 billion, the estimate for cups of coffee sold is nearing 5 billion. Earnings per share growth hit double digits at 10% and same-store sales numbers rose 7% globally.

Starbucks plans for 20,000 locations in the coming year, and in the past few years has significantly expanded beyond coffee. It expanded into specialty teas with its purchase of Teavana, more sweet baked treats by buying La Boulange bakery, and added healthy juices with Evolution Fresh.

However, it is still the company's coffee we crave. Moreover, we like buying it from a physical Starbucks store. Approximately 88% of 2012 revenue coming from stores, 4% from foodservice distributors, and 8% from consumer packaged goods. A full 75% of Starbucks' revenue still comes from its Americas segment.

Starbucks Return Chart

Starbucks Performance Comparison Chart Source: 2012 Annual Report 

Everyman's drug
Dunkin' Brands sells 30 cups of coffee per second. Time for the trusty calculator... that makes 9.46 billion cups annually, although most of that is for at-home consumption.

Dunkin Donuts First Store

First Dunkin' Donuts in 1950 Source:

Dunkin' is a global brand in 60 countries, and at 17,400 locations is running neck and neck with Starbucks despite Starbucks' later start. The company plans for an eventual 15,000 locations in the United States alone.

Dunkin' has a busy breakfast business, which is understandable with 84% of coffee drinkers drinking their brew to help get their mornings started. The company's plan to expand the dayparts (the other meals and snacktimes of the day and night) is promising, however, with a rapidly expanding menu and departure from offering only coffee as a beverage.

In the company's third quarter earnings call, it reported double-digit EPS growth. Management was most excited over two other developments, however: a social media rollout connected to the #mydunkin ad campaign featuring real fans, and the widespread launch of its loyalty rewards program. Both initiatives are designed to grow its loyal customer base even more.

Not that the company needs it. It has earned the no. 1 spot for loyal coffee customers seven years straight as measured by Brand Keys. The company also reported its fourteenth straight same-store sales increase this quarter, with the rise of 4.2% representing both traffic and ticket increases.

Dunkin Fan Of The Week

Source: Dunkin Donuts Facebook Page

McJoe to go
McDonald's has rapidly grown coffee as a category since rolling out the McCafe concept in 2009, especially the iced and specialty coffees which launched in 2010.

Coffee sales have risen 70% since 2009 according to CEO Don Thompson, but the dollar coffee isn't what the company wants to sell. Instead, the company wants to focus on the higher-priced specialty drinks, which are still cheaper than the Starbucks versions. This fall, McDonald's introduced two flavored lattes in holiday flavors: white chocolate mocha and pumpkin spice.

Mcdonalds Global Growth Pie Chart

Source: McDonald's Investor Meeting 

At the November investor meeting, Thompson emphasized that the company wants to grow its beverages. Over 90% of beverage sales come from soda, tea, coffee, or water. Tea and coffee are the company's fastest-growing categories.

COO Tim Fenton promised more expansion for McCafe in Asia, Europe, and the U.S. with more free-standing kiosks and packaged McCafe coffee appearing in stores, a move that was just announced in late December.

McDonald's throws off an average of $7 billion in free cash annually and had returned $3.8 billion to shareholders by October through share repurchases and dividends (with a current dividend yield of 3.10%)

Thompson admitted that McDonald's has underperformed this year, but at a forward earnings multiple of 16.23 compared to Starbucks at 24.71 and Dunkin' at 26.62 it is worth a shot for value investors. McDonald's is also a Dividend Aristocrat, having raised its yield for 25+ years. The yield for Starbucks is only 1.30% while Dunkin's yield is 1.60%.

Java to go
At a 6.91% growth rate expected by year end of fiscal 2014 McDonald's is not the grower that is Starbucks at 20.48% or even Dunkin' at 18.29%. However, McDonald's is a value play for long-term investors. All three are benefiting from our collective addiction to 1-3-7 trimethylxanthin.

No Pitch

AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends McDonald's and Starbucks. The Motley Fool owns shares of McDonald's and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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