I’ve done case studies in the past of slower growing, highly profitable businesses such as Clorox, Nestlé, Coca-Cola, Procter & Gamble, and Colgate-Palmolive among them. We’ve also discussed case studies of some initial public offerings, such as an investment in Tiffany & Company twenty-five years ago. I thought it might be interesting to look at another fast-growing business that was reasonably priced at the time when it first opened its shareholder rolls to outside investors, raising money from the public markets. In this case: The Starbucks IPO.
An investment of $100,000 in the Starbucks IPO twenty years ago would be worth $10,388,082 today. Plus, you would receive $128,000 in cash dividends per year.
The Starbucks IPO has been one of the most successful instances of a mid-size business coming to market and then performing exceptionally well for owners. The coffee giant rolled stores throughout the United States, generated lucrative returns on capital, branched into grocery products and partnerships, and recently instituted a dividend. What counts, though, are the specifics. How much wealth would an owner of the business have enjoyed as a result of writing a check for shares back during the IPO?
How Much Would a $100,000 Investment In the Starbucks IPO in 1992 Be Worth By 2012?
Imagine that is June of 1992. You have $100,000 in savings and you decide to invest it all in the Starbucks IPO. The coffee company is successful, but still relatively small; certainly not ubiquitous as it is now. The stock was sold at $17.00 per share and you were able to buy 5,882 shares, which you stuck in a brokerage account and ignored for the past twenty years. Management didn’t pay dividends until recently, instead opting to reinvest the profits into expansion due to the high return on equity the firm generated.
[mainbodyad]First, your 5,882 shares would have grown to 188,224 shares as a result of five 2-1 stock splits. At a market value of $48.76 per share, your stock would be worth $9,177,802 as of this afternoon. On top of that, since the dividend began in April of 2010, you would have received cumulative cash dividends of $6.43 per share, or $1,210,280 in cash total.
That means between capital gains and dividends, your $100,000 investment grew to $10,388,082 in twenty years. That is a compound annual growth rate of 26.13%, crushing nearly everything that has come or gone since.
Even today, you can expect cash dividends of nearly $128,000 getting deposited into your checking or CCDA account each year; a figure that is likely to grow as the company expands, raises prices, and buys back stock in the future.
A Single Shoot-the-Lights Out Stock In Your Portfolio Can Radically Improve Your Results
The mathematics of huge winners are interesting. Imagine you put together a portfolio of $100,000 back in 1992 but you split the cash into 20 stocks, each of which received a $5,000 investment. You put 19 of the stocks in boring, safe, blue chip stocks that grew at 8% compounded annually, turning $95,000 into $442,791. Then, you put the last $5,000 into Starbucks, which is now worth $519,404. That single high performer is valued more than all other 19 stocks combined.
An investment in Starbucks bought during the IPO now generates more in annual cash dividends than the original cost basis.
Even better, it raised your overall compound annual growth rate from 8% to almost exactly 12%, an enormous, statistically meaningful improvement. It wouldn’t have mattered if many of your original holdings went bankrupt – you would have still generated real gains in purchasing power after inflation and taxes.
The Lesson for Portfolio Management
One of the lessons I take away from case studies like the Starbucks IPO is that it might be a good idea to always have 10% to 20% of your portfolio available for high growth opportunities with good moats that are still reasonably valued. Even if you miss a few, a single winner can shower down riches beyond any other investment you’ve experienced, dragging your compounding rates up along with it.
Personally, I have a soft spot for businesses with a market capitalization of less than $1 billion, a scalable business model that can be replicated, high returns on non-leveraged capital, and a shareholder friendly management. A situation like that doesn’t guarantee success but it exponentially increases the likelihood of making money, provided you aren’t paying 80x earnings or something stupid.
The rewards, financial and psychological, of finding a young business early in its growth and buying into it, watching it turn into something amazing, are extraordinary. You only have to have one or two of these in your business career to change your life forever. You don’t even have to take stupid risks by overcommitting to the stock. As our illustration points out, even a 5% position doubled the value of the overall portfolio.
The final lesson is: When the underlying business is healthy, do not panic. During the Great Recession, Starbucks shares lost a staggering 75% of their market value. You would have watched a $1,000,000 investment collapse to $250,000. Just because other investors are doing something stupid (paying too much or paying too little) doesn’t mean you have to participate. Focus on the long-term prospects of the enterprise relative to the price, collect the cash you are sent in the mail, and avoid being an idiot. That is all that is required to compound money. Also, have enough seeds planted that you won’t lose ground if one goes bust, which will inevitably happen from time to time.
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Reader Comments (14)
Comments are presented chronologically, with replies indented beneath the comments to which they respond.
AJ
October 10, 2012
Your blog is such a blessing! I swear your ability to take something that is so complex for most people and explain in it such an easy to understand manner can be likened to a divine spiritual gift. Nice post as always.
FratMan
October 12, 2012
Stylistically, what do you think of Sardar Biglari?
Joshua Kennon
October 12, 2012
Replying to FratMan
I'd prefer not to answer at this time for my own reasons. I don't feel that I have enough information to make a fair assessment.
Kenneth
September 12, 2014
What is the best performing stock in the last 20 years?
David
October 15, 2014
How do you calculate dividends of 6.43 per share? shouldnt it be 1.26 USD per share until june 2012 ??
Joshua Kennon
October 15, 2014
Replying to David
The dividend figure is cumulative as of the date of this post so we could arrive at the total return, not indicative of the current annual dividend, which is what you are referencing. An illustration might help you understand the difference if your are unfamiliar with the distinction.
Imagine you bought a stock ten years ago for $50.00 per share. At the end the ten years, the stock is trading at $120.00. That means you have an unrealized capital gain of $70.00 per share. In addition, over the ownership period, you also collected the following dividends:
Year 1 = $1.00
Year 2 = $1.10
Year 3 = $1.20
Year 4 = $1.30
Year 5 = $1.40
Year 6 = $1.50
Year 7 = $1.60
Year 8 = $1.70
Year 9 = $1.80
Year 10 = $2.00
In the final year the annual dividend is $2.00 per share but you, as an owner, have collected cumulative dividends of $14.60 over that period, which is the number you need to add to the change in stock price to determine your total return. (In this situation, you'd take the unrealized capital of $70 ($120 current market price of stock - $50 cost basis = $70 unrealized gain) and add it to $14.60 in cumulative dividends to get a total pre-tax return, or profit, of $84.60.)
enc
October 16, 2014
5882 share after (5) 2-1 split will be 183 shares NOT 5882*32!!!
Joshua Kennon
October 16, 2014
Replying to enc
You are confusing a 2-1 stock split with a 1-2 reverse stock split. They are not the same. The latter are very rare compared to the former and have no relevance to Starbucks since it has never declared a reverse stock split. A reverse stock split comparable to the one you are calculating is almost exclusively used as an emergency capitalization change in the hopes of staving off delistment from a stock exchange following major losses or catastrophe. AIG, for example, was forced to reverse split its stock 1-for-20 following its collapse.
In the case of Starbucks, it has effected five individual 2-1 stock splits during its publicly traded history. The math would look like this:
You buy 5,882 shares and they split 2-1. You now have 11,764 shares.
You have 11,764 shares and they split 2-1. You now have 23,528 shares.
You have 23,528 shares and they split 2-1. You now have 47,056 shares.
You have 47,056 shares and they split 2-1. You now have 94,112 shares.
You have 94,112 shares and they split 2-1. You now have 188,224 shares.
jerkstores
February 7, 2015
I'm just looking at this now. Yesterday Starbucks closed at $89 per share. Your original investment would currently be worth $16,751,936 plus you would be collecting $240,926.72 per year in dividends right now, almost 250% your original investment of $100k coming back in a single year's dividend checks. Even if you only bought during the Great Recession for a price of say, $10, you'd be seeing 12.816% of your investment returning to you in the form of dividends this year alone.
This is really amazing, but it's not as easy as getting a good price on a company like General Mills.
Oe
March 20, 2015
Could you point me to the article that explains why shares will increase in number (not value) over time?
turbulent time
May 6, 2015
Priceline. I own 150 shares since 2002. That's why I know. My cost was $9.80 per share. It is $1,246.15 per end of session today May 6th, 2015. 12,716% increase. I also wish I knew Apple would be a big success at that time in 2002. However, I should have sold my new car in 2002 and bought more share of Priceline.
Steve Roberts
May 7, 2015
Replying to turbulent time
What would $1500 in APPL have returned over the same period?
Congrats on the grand slam. I hope it's in a ROTH IRA.
turbulent time
May 7, 2015
The questions is what is the next big things, which is still relatively small now and relatively unknown by the majority of the investment communities around the world so that the per share price is not a crazy multiples of its revenue. Marley Coffee seems to fit this bill. Anyone who drink coffee especially K-cup from Keurig knows that the K-cups are all dumped to landfills. Meaning, none of these fast-selling K-cups are recyclable. Marley Coffee will change all that starting this July of 2015. Marley Coffee will be the World's first coffee company to market their 100% recyclable K-cups, called EcoCups. Besides, they have been building a network of supply to major supermarket chains across United States since six years ago. Recently, they have won shelf spaces in Walmart and Subway in Chile. They are in the process of entering the South Korean market. All their coffee are high-end USDA certified organic, and Rainforest Alliance Certified.
Much like Monster Beverage in last decade, which built out its network of supply and their efforts started to pay off in the seventh years after they first landed their beverage in the first shelves of supermarkets. Marley Coffee is entering its sixth and a half year of building out its network of supply. Keep an eye on them even if you don't feel like committing your investment fund yet. Founder of Marley Coffee, Rohan Marley, has already expressed his determination that his business, Marley Coffee, will be in the league with all the big boys in the next decade. On one builds an emperor overnight, and I have tried their Blue Mountain Coffee, they taste fantastic!
turbulent time
May 7, 2015
Keep it up, Joshua. Your articles are great. Hope we will both invest successfully.