Starbucks (SBUX 1.00%) and Disney (DIS 0.18%) are two of my favorite long-term holdings. I'm always looking to add to both positions when the market gives me a fair opportunity to do so. Rather than try to find true bargains with stocks that may have dropped 20%, 30%, or 40%, but pose a far greater risk of permanent loss of capital, I think a lot of investors would be better served looking to solid names like these.
While there are certainly a number of wonderful companies on the market, I think Starbucks and Disney provide investors with an excellent chance to outpace the market over the long run, should become wonderful dividend payers in the future, and have a negligible chance of leading to permanent loss of capital. That, not short-term volatility, is the biggest threat to the long-term Foolish investor.
Image source: Disney.
Global opportunities and a diversity of revenue streams
Disney is a revenue-generating machine, having grown its top line from $31.94 billion to $51.34 billion on a trailing-12-month basis. It has done so not on the back of one revolutionary drug, industrial process, or product, but rather from a diverse portfolio of related businesses. Theme parks; media properties such as ESPN; merchandising royalties from its treasure trove of beloved princesses, superheroes, and other characters; and its film studios all provide revenue and revenue growth. In the most recent quarter, each of the four largest operating segments grew revenue at least 4% year over year, and segment operating income grew 7% overall.
Disney has a blockbuster slate of films ahead of it for the foreseeable future. The Star Wars franchise, Marvel, and Pixar have been beautifully integrated acquisitions that should continue to bear fruit for shareholders for decades to come. International expansion with the opening of Shanghai Disney will serve to pull more consumers into the Disney fold. Content creators will continue to have a great deal of leverage as linear TV becomes a relic of the past. Disney controls a great deal of the most lucrative content. ESPN, ABC, and Disney branded channels will continue to create content that consumers want. Whether it's sold through linear television, through outside streaming services, or directly through a Disney app or service, the company will benefit.
If there is weakness in one or two areas of Disney's business over the short term, it doesn't jeopardize the company's long-term trajectory, because other operating segments should be thriving. When all of the segments are performing as well as they should be, this is a company with nearly limitless growth potential.
Image source: Starbucks
Meanwhile, Starbucks has become a ubiquitous global brand on the back of its coffee, in-store atmosphere, and relentless global expansion. Revenue has nearly tripled over the past decade, but this global growth story is far from over. There are a few levers that Starbucks is already using to continue to drive growth.
There are some seriously underserved foreign markets. Starbucks has over 22,000 stores globally, with more than half located in the United States. It retains only a small presence in massive countries such as Brazil, India, and China. While I don't expect penetration to reach U.S. levels in these countries, I do expect significant growth over the next few decades.
The acquisition of brands such as Teavana and La Boulange are helping Starbucks move beyond coffee. Tea sales are much larger in countries such as India, and La Boulange, which was a well-regarded small bakery chain in San Francisco before being acquired, should help Starbucks increase its food sales at both breakfast and lunch. Starbucks is also pushing success in the mobile world by recently expanding its Mobile Order & Pay system. Further initiatives such as selling wine and beer at nighttime I am less enthused by, but I like that management is trying to find new revenue streams. While I'm not sure whether it will work, I do trust that management and CEO Howard Schultz in particular will change course if necessary.
Dividends: Some now; more later
Disney currently has an annual dividend payout of $1.32 per share, which currently provides investors with around a 1.75% yield. The company's payout ratio is low, at 37.62%, which gives me confidence that the dividend is safe for the foreseeable future and that more yearly increases to the dividend should be in order. The company continues to pour money into new theme parks, live sports contracts, and blockbuster films, which will increase net income in the future. If earnings grow in line with dividend increases, the payout ratio can remain conservative while the real payout in dollars continues to grow.
Starbucks currently has an annual dividend payout of $0.64 per share and yields a little over 1% at current prices. Its payout ratio is similar to Disney's at 34.38%, and I feel equally confident about the safety and growth of the dividend going forward. The yields on both of these companies are lower than that of the S&P 500 largely because of how well their stocks have performed over the past five years. Investors who bought Starbucks five years ago at around $12 or Disney at around $33 have significantly higher yields on their original investments than those I've mentioned.
I expect this trend to continue over the next five, 10, and 20 years. Don't feel like you missed out on these great companies because their stocks are up 2 or 3 times in value in the past half-decade. Great companies usually continue to be great companies. They continue to generate excess earnings growth, and over the long run stock prices track earnings.
The forward valuations are fair for these super-premium companies. Starbucks trades at a forward P/E below 30, while Disney is under 19. Overall, Disney is the more conservative investment, while I think Starbucks provides more potential upside if things break right for it. They are both cornerstones of my portfolio, and investors could do a lot worse than picking up some shares of each and holding on for share-price and dividend growth over the decades to come.
