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Why Starbucks Is a Retiree's Dream Stock

By Daniel B. Kline - Mar 4, 2020 at 8:15AM

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The coffee chain offers growth and stability.

Starbucks (SBUX 3.76%) has built a business that's resilient even in an economic downturn. If people are worried about the economy, they may opt to postpone vacations or hold onto their car for longer. They won't, in most cases, stop visiting the coffee chain because it offers affordable indulgences -- a way to treat yourself without really breaking the bank.

The company also continues to grow its global footprint, and it has proven that its model works around the world. Add in that Starbucks has committed to returning capital to shareholders, and it's easy to see why the company's stock fits into a dream retirement portfolio.

Starbucks CEO Kevin Johnson working in a store

Starbucks' CEO Kevin Johnson is seen working a shift in one of the chain's stores. Image source: Starbucks.

Starbucks has room to grow

While Starbucks may be considered a mature business in the United States, it still has significant room to grow globally. It also has the ability to increase sales in all markets through beverage innovation, delivery, and adding new products.

The company had a very strong first quarter, and CEO Kevin Johnson offered some color on those results during his company's earnings call.

"These results were fueled by a healthy balance of comparable sales growth and new store development, as well as continued expansion of our Global Coffee Alliance with Nestle," he said, continuing:

I'm especially pleased that we delivered meaningful margin expansion in the quarter, even as we continued to invest in the key areas to support sustainable growth, first and foremost in our partners as well as in beverage innovation and digital customer relationships.

Johnson said that the company would have revised its full-year projections up but did not due to uncertainty over coronavirus. The virus has disrupted some business in China, and it may affect the company globally. That, however, is a short-term problem, and it may allow investors to buy shares at a discount.

In the long run, China will be a huge market for the company with enormous potential for growth. Q1 results, which were not affected by coronavirus, were very strong.

"Our partners in China also delivered a solid quarter with revenues increasing by 15% in Q1, excluding a 2% impact of foreign exchange, fueled by a 16% increase in net new stores over the past 12 months and a 3% increase in comps," the CEO said. "And for the fourth consecutive quarter, we grew total transactions at a double-digit percentage pace in this strategically important market."

Starbucks leads in tech

Unlike many restaurant chains, Starbucks does not solely rely on traditional methods to drive business. The company has a huge digital presence that it can use to communicate with customers and drive sales.

"In the U.S, we added a record 1.4 million customers to our 90-day active Starbucks Rewards member base, ending the quarter with 18.9 million active members, a 16% increase over prior year," Johnson said. "This is important because we know from experience that when customers join our rewards program, their total spend with Starbucks increases meaningfully."

Starbucks can use the information it gets from its app to drive customer behavior. It can, for example, offer deals during slower parts of the day, or offer incentives for customers to come back for a second visit.

"We also know that Starbucks is increasingly valued for convenience as the mix of Mobile Order & Pay transactions in the U.S. grew to 17% in Q1, and our industry-leading digital platform will further differentiate us from the competition over time," Johnson added.

More than a coffee company

Johnson has balanced growth with fiscal responsibility and returning cash to shareholders. That's a perfect mix for retirees who can benefit from dividends as well as from the company expanding its store base, growing its technology lead, and continuing to innovate with its menu.

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