Motley Fool: What’s brewing at Starbucks

If you’re looking for a dividend-paying stock with solid growth potential, consider the company behind that pricey cup of coffee you’re drinking. There’s a lot to like about Starbucks (Nasdaq: SBUX).

For starters, it boasts more than 26,000 stores worldwide and opened 575 net new ones in just the last quarter, aiming for 37,000 stores by 2021. Its Starbucks Rewards membership tops 13 million and is still growing, and the Starbucks mobile app has been very successful, too, with about a quarter of orders being placed or paid for via the app. The company has been expanding its offerings, aiming to sell more food products and packaged goods in addition to coffee.

Meanwhile, Starbucks has great growth potential abroad, and is targeting population-rich China, among other locations. There were recently 2,800 locations in 130 cities in mainland China. Overall, Starbucks’ revenue and earnings have been growing by double-digit rates annually, on average, over the past five years, and annual revenue tops $20 billion.

Remember that dividend? It recently yielded 1.8 percent, and it has been increased more than threefold over the past five years. Starbucks’ price-to-earnings (P/E) ratio recently near 28 may seem steep, but it’s reasonable for such a growing company, and it’s lower than it has been in much of the past decade. (The Motley Fool has recommended and owns shares of Starbucks.)

Ask the Fool

Q: I see that GlaxoSmithKline recently named Emma Walmsley as its new CEO. What other major companies have women CEOs? – P.S., Maryville, Tennessee

A: As of earlier this year, there were 26 women heading S&P 500 companies – just 5 percent. They included General Motors (Mary Barra), IBM (Virginia Rometty), Duke Energy (Lynn Good), Lockheed Martin (Marillyn Hewson), PepsiCo (Indra Nooyi), General Dynamics (Phebe Novakovic), Hershey (Michele Buck), Occidental Petroleum (Vicki Hollub) and Mattel (Margo Georgiadis). Two other financially powerful women include Federal Reserve Chair Janet Yellen and Christine Lagarde, who heads the International Monetary Fund.

Companies might do well to appoint more female CEOs. According to research by Quantopian, Fortune 1000 companies led by women outperformed the S&P 500 by 226 percent between 2002 and 2014.

Q: What does the insurance term “float” mean? – A.G., Saginaw, Michigan

A: Warren Buffett, who heads insurance giant Berkshire Hathaway, explained it well in his 2002 letter to shareholders:

“[F]loat is money we hold but don’t own. In an insurance operation, float arises because premiums are received before losses are paid, an interval that sometimes extends over many years. During that time, the insurer invests the money. This pleasant activity typically carries with it a downside: The premiums that an insurer takes in usually do not cover the losses and expenses it eventually must pay. That leaves it running an ‘underwriting loss,’ which is the cost of float. An insurance business has value if its cost of float over time is less than the cost the company would otherwise incur to obtain funds. But the business is a lemon if its cost of float is higher than market rates for money.”

Learn more from the insurance industry itself at iii.org.

My dumbest investment

About 30-plus years ago, I responded to a cold call from a financial services company and invested in several penny stocks that all lost money. I believe later someone from the company ended up going to jail because of the scam. I mean, they advertised with a big jet helicopter landing in front of a very impressive high-rise on a plush campus on the doggoned “Meet the Press” TV program. Who would have suspected that anything shady was going on? Not me, of course. – R.B., online

The Fool responds: People are still falling for cold callers’ aggressive pushes, but you were at a major disadvantage 30 years ago, as you couldn’t look up the financial company online and you couldn’t do any research into the companies behind the stocks being pushed, either. Today it’s relatively easy to look up information on companies – and if you aren’t able to find much, that’s a big red flag right there. Many penny stock companies don’t have websites offering copies of audited financial statements filed with the Securities and Exchange Commission, making it hard to determine if they have any revenue, not to mention earnings. One of the best things to do if you get an unsolicited phone call from someone pitching an investment is simply to hang up.