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Dunkin' Brands, Starbucks, and Tim Hortons: 3 Coffee Companies to Watch

By William Bias - Feb 3, 2014 at 10:25AM

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When looking for investment ideas, consider looking toward popular national restaurant chains.

When looking for investment ideas, consider looking toward popular national restaurant chains. Popular coffee chains such as Dunkin' Brands (DNKN), Starbucks (SBUX 1.22%), and Tim Hortons (THI.DL) represent good examples. These chains sell the much needed morning caffeine jolt in the form of coffee and cappuccino, and/or a doughnut. They also sell food providing nourishment for the day.

The two-in-one company
Dunkin' Brands, via its network of franchisees, operates 10,800 Dunkin' Donuts restaurants and 7,100 Baskin-Robbins ice cream shops as of the most recent quarter. Essentially, shareholders buy into a company that receives royalty income from two different restaurant sources. Moreover, Dunkin' Brands utilizes a "nearly 100 percent franchised business model." This means that the franchisees do the heavy lifting on overhead costs.

Overall, Dunkin' Brands grew its revenue and net income 9% and 36%, respectively, in the most recent quarter. The company is growing both domestically and internationally, with more robust growth coming from the international markets. Dunkin' Donuts and Baskin-Robbins grew revenue 9% and 2%, respectively, on the domestic front and 14% and 11%, respectively, on the international front in the most recent quarter. Last year, Dunkin Brands paid out 53% of its free cash flow in dividends, offering $0.76 per share per year, translating into a yield of 1.6%.

Starbucks also still growing
Starbucks and its franchisees operate more than 20,000 stores globally. This company also performed well in its most recent quarter, with revenue and net income increasing 12% and 25%, respectively. Starbucks' Americas segment saw its revenue expand 8%. It saw more growth from international markets, with its Europe, Middle East, and Africa segment and China/Asia-Pacific segment expanding revenue 11% and 25%, respectively. Starbucks' channel development segment, which includes grocery store placement of its products, grew 7% in the most recent quarter.

Starbucks sits on $1.4 billion in gift card loads waiting to be recognized in revenue. CEO Howard Schultz said that gift cards represent a good way to introduce Starbucks to new customers. The company also sells tea and premium juice, and is experimenting with handcrafted carbonated sodas. Last year, Starbucks paid out 36% of its free cash flow in dividends. Currently, the company pays $1.04 per share per year in dividends, translating into a yield of 1.4%.

The Canadian coffeehouse
Tim Hortons and its franchisees hold the No. 1 spot in Canada in terms of size, with 4,350 restaurants. The United States and the Middle East serve as a home to 817 and 33 restaurants, respectively. The company certainly lacks the ubiquity of Starbucks and Dunkin' Brands; however, it also has room for expansion since its presence beyond the western hemisphere is almost nonexistent.

Also, most of Tim Hortons' restaurants are franchised. Overall, the company grew revenue and net income 3% and 8%, respectively, in the most recent quarter. Franchise-related revenues expanded 7% during that time frame. Its revenue in the more highly penetrated Canadian markets increased a meager 0.5% last quarter. Revenue in Tim Hortons' U.S. segment grew 20% during that time frame. Last year, Tim Hortons paid out 40% of its free cash flow in dividends. Currently, the company pays its shareholders $0.99 per share per year, yielding a decent 1.9%.

Looking ahead
All three companies face plenty of room for expansion in the international markets. People need that morning caffeine to get a start on their day, and these companies can fill that need. In the case of Dunkin' Brands, Baskin-Robbins provides the company with a little more diversity. Moreover, its 100%-franchised model allows the company to focus on its brands and products. Starbucks' recent entry into the tea and juice markets will provide it with additional potential for long-term gains. Also, if its experimentation with carbonated sodas goes well, that will give Starbucks another feather in its cap. Continued economic recovery will get Tim Hortons back on track. It faces plenty of room for expansion in the United States, Asia, and markets in the Middle East. All three of these companies belong on your Motley Fool Watchlist and deserve more of your research time.

William Bias has no position in any stocks mentioned. The Motley Fool recommends Starbucks. The Motley Fool owns shares of 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.

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Starbucks Corporation Stock Quote
Starbucks Corporation
$87.05 (1.22%) $1.05
Dunkin' Brands Group, Inc. Stock Quote
Dunkin' Brands Group, Inc.
Tim Hortons Inc. Stock Quote
Tim Hortons Inc.

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