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Starbucks' High Should Keep You Awake at Night

The next graphic adds dividends, an important component of total return, reflected in two important ways. The pink line on the graph simply plots Starbucks' dividends, which were initiated in September 2010. The green shaded area below the pink line reflects the portion of earnings (the green shaded area) that the company paid out, which is commonly referred to as the payout ratio. Here we see that Starbucks is currently paying out about a third of their earnings to shareholders in the form of dividends.

The light blue shaded area stacked on top of the orange line also depicts dividends. However, with this iteration the dividend is represented as the income component of return, in addition to the capital appreciation component. Total return is capital appreciation plus dividend income.

Long-term shareholders in Starbucks have been lavishly rewarded by the company's long-term record of excellence. For those worried about the level of the stock market, the following performance report on Starbucks associated with the above graphs clearly illustrate that the stock market had nothing to do with Starbucks' long-term returns.

A $10,000 investment in Starbucks on Dec. 31, 1998, would have grown to $92,963.94, representing an annualized rate of return of 16.6%. Add in the dividends that it has paid since the fall of 2010 of $2936.31, and the total return, capital appreciation plus dividends paid, increases to $95,900.25 for a 16.9% per annum total return.

The following graph plots the historical P/E ratio (the dark blue line) in conjunction with 10-year Treasury note interest. Notice that the current price earnings ratio has been steadily declining since it became overpriced in fiscal 2000. However, as we've come out of the great recession of 2008, Starbucks' P/E ratio has been back on the rise and currently sits at 32.

A further indication of valuation can be seen by examining a company's current P/S ratio relative to its historical P/S ratio. The current P/S ratio for Starbucks is 3.48.

The following graph illustrates that Starbucks has consistently increased its book value per share since 1998. Perhaps the important takeaway here is that book value per share (bkvlps) continued to grow right through the recession.

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