Motley Fool: Profits are brewing

If you’re looking for a company that’s growing at a healthy clip, pays a dividend and has been increasing that dividend regularly, take a closer look at Starbucks (Nasdaq: SBUX). Its dividend recently yielded 1.7%. And that payout has been increased by an average of more than 20% annually over the past five years, with more room to grow.

With its strong brand and plenty of customer loyalty, Starbucks has been able to sell a relatively simple product – coffee – at premium rates. Its commitments to purchasing goods from ethical sources and to being environmentally friendly reflect a focus on important issues that resonate with its customers. In its last fiscal year, Starbucks posted revenue of $26.5 billion, up 7% over year-ago levels – impressive, given the size of the company.

Starbucks has been able to grow in part by expanding its offerings to include more foods (such as breakfast fare), and by rolling out new items such as its Nitro Cold Brew. It has also broadened its reach around the globe, recently boasting more than 30,000 locations worldwide and aiming for further growth in areas such as China. Its Starbucks Rewards program is a growing success, with more than 17 million members, and it’s rolling out delivery services, as well. (The Motley Fool owns shares of and has recommended Starbucks.)

Ask the Fool

Q: I read that shares of Beyond Meat were down because of its “IPO lockup period.” What’s that? – J.H., Los Angeles

A: It’s common in initial public offerings (“IPOs,” when companies first issue stock to investors) that insiders who hold shares are not allowed to sell any for a set period of time after the IPO – typically between three and six months. That’s the lockup period, and it’s meant to keep share prices stable or rising. Stock prices often head south for a while once the lockup period expires and some insiders start selling.

In the case of Beyond Meat, when the lockup period ended, about 80% of the company’s shares became available for trading. The company posted strong third-quarter results the day before the expiration, but shares dropped about 20% upon expiration anyway.

It’s often wise to steer clear of IPOs for their first year or so, to give the shares time to settle down.

Q: What does it mean if a company is described as growing too fast to be profitable? –D.L., Coventry, Rhode Island

A: A company’s profits are simply what’s left after its expenses are subtracted from its revenue. But expenses are, to some degree, under the control of company management.

For example, if a company wants to grow briskly, it might spend as much as possible hiring more workers and advertising. It might even cut its prices to win customers from competitors. Such moves will shrink its profits and can lead to losses. Some companies will even borrow heavily to invest in growth. Trading profits for growth can work out well, for companies such as Amazon.com, or poorly, if it ends in bankruptcy.

My dumbest investment

My dumbest investment was buying shares of Micron Technology. – Jacob, online

The Fool responds: You didn’t elaborate, but you presumably lost money on your investment. Investors in Micron, a digital memory and storage titan recently sporting a market value above $50 billion, have made or lost money depending on when they bought and when they sold – as is the case with any stock.

Micron, though, is a “cyclical” stock, meaning that its fortunes rise and fall with economic cycles and depending on the supply and demand for its commodity memory chips. The market for memory chips was strong in 2017 and 2018, but has slumped in 2019, leading to more volatility for Micron.

Proponents of the stock see new and growing sources of demand for Micron’s offerings in realms such as cloud computing, “the Internet of Things,” self-driving cars and artificial intelligence. Bears, though, note that supply could still outstrip demand in the future, which will send shares south. Indeed, from 2007 to 2017, when the number of smartphones (which need memory chips) soared, Micron made money in some years and lost money in others.

Micron may serve patient long-term investors well, but there are plenty of less cyclical stocks for risk-averse investors to choose from. “Defensive” stocks, for example, are tied to companies whose products will always be in demand, such as medicines, soaps, electricity and food.