Big, old leaders such as Starbucks still see plenty of growth ahead.
Angus Mordant/BloombergI love a good five-year plan. My 2025 goals are to be slim, rich, powerful, and adored, or as a fallback, comfortably dressed and tolerated.
Starbucks (ticker: SBUX) and Walt Disney (DIS) announced ambitious new goals of their own this past week. Investors seemed cheered to learn that big, old leaders still see plenty of growth ahead. Starbucks stock rose 5% the day after its presentation, and Disney jumped 13%.
In overcaffeinated fashion, Starbucks shot straight past five-year planning to project that it will grow to 55,000 stores from 33,000 by its fiscal year ending in September 2030. The plan is to increase the U.S. store count by only about 3% a year, but to expand faster in other markets, especially China, pegged at a low-teens growth rate.
Many of the new overseas stores will be opened under licensing agreements, and those bring higher profit margins than company-owned stores, along with faster returns on invested capital, or ROIC. Starbucks thinks that could unlock a “10-20-30 scenario” by fiscal 2024. That means earnings-per-share growth of at least 10%, fueled by operating margins approaching 20%, and ROIC near 30%—all significant improvements from recent results. The company describes that outcome as “possible,” which I take to mean that management is at least 50/50 on 10-20-30, but visibility isn’t 20/20.
Starbucks stock is up 19% this year and priced at a frothy 37 times this year’s projected earnings, but recent growth was interrupted by quarantining. During the presentation, CEO Kevin Johnson was upbeat on life after the pandemic. “I believe Starbucks will be a top destination to facilitate social healing through human connection,” he told investors.
I’m all for healing, but let’s agree not to hug or high-five while holding scalding beverages.
For more than three hours, Disney streamed to investors about all the streaming it’s doing. The company surprised even bulls by reporting that subscribers for Disney+ and ESPN+ had already hit the high end of management projections—for fiscal 2024.
When your five-year plan turns into a one-year plan, you need something to do for the remaining four years. So Disney said it would reach 300 million to 350 million subscribers worldwide by fiscal 2024 for its three major streaming brands combined: Disney+, ESPN+, and Hulu. That compares with 137 million now. Netflix has 195 million subscribers.
Disney also raised streaming prices. Blowout subscriber growth and higher prices mean that Disney could turn profitable on streaming ahead of its fiscal-2024 projection, but it kept that guidance in place. Why? To allow for massive spending on content—an estimated $14 billion to $16 billion in fiscal 2024 alone. The company said its Marvel and Star Wars franchises will each get 10 new series for streaming over the next few years. Its Disney and Pixar studios will get a combined 10 series and 15 movies, also for streaming. If show business is becoming an arms race, Disney is starting to look like a Death Star with Mickey Mouse ears.
I miss movie theaters—spilling Dr Pepper on my TV-room floor to get my sneaker bottoms sticky for The Mandalorian on Disney+ just isn’t the same. Disney talked about being flexible in its distribution, and said there would still be a role for theater releases ahead of streaming. But it also said that some of the movies soon headed to streaming were originally slated for theaters, like Pixar’s Soul, which will arrive on Disney+ on Christmas.
Disney says its peak losses from streaming will hit this fiscal year, which is just as well, because with theme park attendance restricted by the pandemic, expectations for overall earnings per share this year are low—but positive.
Bank of America pounded the table on Disney stock, writing in a report for investors that it trades at 23 times projected earnings for fiscal 2023.
That’s well above where Disney used to trade, but it’s cheap compared with Netflix (NFLX), and in a Hollywood twist, Disney suddenly looks capable of catching up with Netflix on subscribers.
If you enjoy lending money, but only if you can pay interest rather than receive it, I have good news: Your options are expanding. Spain, Portugal, and Italy all issued government bonds with negative yields in recent days, a first for each.
But what about old-fashioned investors who insist that income investing should produce income?
UBS has some ideas. Look to emerging markets, its strategists wrote this past week. Sovereigns there yield over 4% as a group, “compensating well for the risks.” There are exchange-traded funds for exposure, like Invesco Emerging Markets Sovereign Debt (PCY). Another place to look for yield, the strategists write, is among corporate bonds in the “crossover zone.” That’s a nice way of saying junky, but only a little.
Finally, there are stocks with relatively high dividend yields. The problem with those, wrote Credit Suisse chief equity strategist Jonathan Golub in a separate note, is that on average over the past decade, they have exhibited falling returns on equity, deteriorating sales growth, and elevated leverage and volatility.
His folks recently screened for companies with decent dividend yields and better fundamentals. Their list includes chip maker Broadcom (AVGO), which yields 3.2%; drug companies Bristol Myers Squibb (BMY), 3%, and Johnson & Johnson (JNJ), 2.6%; conglomerate 3M (MMM), 3.4%; PepsiCo (PEP), 2.8%; toy giant Hasbro (HAS), 3.1%; and tobacco company Philip Morris International (PM), 5.7%.
Of course, stocks aren’t as safe as bonds—they’re not supposed to be, anyway. Golub’s note is titled “Finding Opportunities in a Broken Universe.”
If the universe is broken, I’m not sure how to compare safe bonds that will definitely lose money when held to maturity with risky stocks that might make money if held long term. Analytically, I’m in a bit of a crossover zone on this one.
Write to Jack Hough at jack.hough@barrons.com. Follow him on Twitter and subscribe to his Barron’s Streetwise podcast.
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Starbucks and Disney Are Stock Stalwarts That Still Offer Growth - Barron's
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