Starbucks vs. Nike: Which Stock's Dividend Dominates?
Dividend stocks outperform non-dividend-paying stocks over the long run. It happens in good markets and bad, and the benefit of dividends can be quite striking -- dividend payments have made up about 40% of the market's average annual return from 1936 to the present day.
But few of us can invest in every single dividend-paying stock on the market, and even if we could, we're likely to find better gains by being selective. Today, two of America's most recognizable aspirational retail brands will square off in a head-to-head battle to determine which offers a better dividend for your portfolio.
Tale of the tape
Starbucks is the world's largest specialty coffee retailer. Founded in 1971 and headquartered in Seattle, the company's aggressively expanded from a single store in Seattle's Pike Place Market to more than 18,000 stores across 60 countries, which are operated by licensees, franchisees, or Starbucks itself. The company underwent a major restructuring in the late 2000s, when it shuttered more than 300 domestic stores while simultaneously launching 900 new stores outside the United States. The company has also formed a strategic alliance with Tata Coffee, Asia's largest coffee producer, to bring Starbucks to India, the world's second-most populous country.
Founded in 1964, Nike , formerly Blue Ribbon Sports, is the world's largest supplier of shoes and apparel, and is also a leading manufacturer of sportswear and equipment. The company markets branded products through a combination of more than 800 branded retail stores, subsidiaries, other retailers, distributors and licensees across the world. The company recently launched a new product range called Nike Free, which has become a popular choice for athletic footwear consumers, and also has a range of digital fitness trackers headlined by Nike+, which can interface with users' computers and smartphones to enhance exercise experiences.
Trailing 12-month profit margin
TTM free cash flow margin*
Five-year total return
Round one: endurance (dividend-paying streak)
According to Dividata, Starbucks began paying dividends each quarter in 2010, for a 4-year long dividend-paying streak. That makes this an easy win for Nike , which has made regular payments to shareholders for more than 25 years since it first initiated dividends in 1987.
Winner: Nike, 1-0.
Round two: stability (dividend-raising streak)
Starbucks has increased its dividend payouts at least once every year since it began paying dividends in 2010. However, Nike has been raising its dividend at least once per year since 2003, according to Dividata. A solid decade of dividend-raising lets Nike win the stability crown without any hassles.
Winner: Nike, 2-0.
Round three: power (dividend yield)
Some dividends are enticing, but others are merely tokens that barely affect an investor's decision. Have our two companies sustained strong yields over time? Let's take a look:
Winner: Nike, 3-0.
Round four: strength (recent dividend growth)
A stock's yield can stay high without much effort if its share price doesn't budge, so let's look at the growth in payouts over the past five years.
Winner: Starbucks, 1-3.
Round five: flexibility (free cash flow payout ratio)
A company that pays out too much of its free cash flow in dividends could be at risk of a cutback, particularly if business weakens. We want to see sustainable payouts, so lower is better:
Winner: Nike, 4-1.
Bonus round: opportunities and threats
Nike may have won the best-of-five on the basis of its history, but investors should never base their decisions on past performance alone. Tomorrow might bring a far different business environment, so it's important to also examine each company's potential, whether it happens to be nearly boundless or constrained too tightly for growth.
- Coffee companies could benefit from the falling prices of Arabica beans.
- The company plans to open 1,500 new locations, reaching a total of 20,000 stores by 2014.
- Starbucks has been focusing on high growth markets, such as China and other Asian countries.
- The company recently filed a trademark application for its own carbonated beverage.
- Starbucks will benefit by collaborating with Green Mountain Coffee Roasters.
- Nike's latest innovation, the Nike+ Fuelband, tap into the "quantified self" fitness movement.
- The global wearable-tech products market is expected to grow to $20 billion by 2017.
- Nike's Free Flyknit running shoes continue to attract substantial amount of customers.
- The company recently became a member of the prestigious Dow Jones Industrial Average.
- Dunkin' Brands plans to open 150 stores in the U.K. by 2018.
- Dunkin' also aims to double its domestic footprint to nearly 15,000 restaurants.
- Dunkin' plans to roll out a loyalty program to drive profits with targeted offers.
- Under ArmouracquiredMapMyFitness to battle Nike's FuelBand.
- Under Armour also partnered with Tottenham Hotspur to enter European markets.
- Foot Locker has been remodeling its stores to catch up to Nike and Under Armour.
One dividend to rule them all
In this writer's humble opinion, it seems that Nike has a better shot at long-term outperformance, thanks to its commitment to innovative products, its ubiquitous brand recognition, and its unrivalled merchandising strategies. The company's Fuelband line also offers the chance to build a new moat among tech-savvy fitness fans, although this is sure to be a highly competitive arena. Starbucks, on the other hand, could benefit greatly from an expanded presence in the emerging markets, but it may face fierce competition from other specialty coffee outlets. You might disagree, and if so, you're encouraged to share your viewpoint in the comments below. No dividend is completely perfect, but some are bound to produce better results than others. Keep your eyes open -- you never know where you might find the next great dividend stock!
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The article Starbucks vs. Nike: Which Stock's Dividend Dominates? originally appeared on Fool.com.Fool contributor Alex Planes has no position in any stocks mentioned. The Motley Fool recommends Green Mountain Coffee Roasters, Nike, Starbucks, and Under Armour and owns shares of Nike, Starbucks, and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.