To The Moon

$Microsoft(MSFT)$ $Visa(V)$ $Walt Disney(DIS)$ $Wesco International Inc(WCC)$ $Starbucks(SBUX)$

Number 5: Starbucks Corporation (SBUX)

The next stock on our list is a widely recognized name: Starbucks Corporation (ticker: SBUX). Over the past year, the stock has experienced significant volatility, declining about 9%. For example, it dropped from $88 to $72 at one point, then rebounded to $95 following the announcement of a new CEO from Chipotle. Recently, it climbed above $100 before retreating to $86.99.

One of the key factors impacting Starbucks is the ongoing strike by union workers in nine states, which is concerning for shareholders. Historically, Starbucks has been a strong dividend growth stock, with a current yield of approximately 2.67% and a 10-year dividend growth rate of 133%. However, dividend growth has slowed, with a 5-year CAGR of 6.67%.

Starbucks’ free cash flow payout ratio is another area of concern. In 2023, it stood at 77.91%, indicating that a large portion of free cash flow is being used for dividends, leaving less for reinvestment. Over the past three years, the ratio has ranged from 66% to 88.5%, showing a trend of high cash flow allocation to dividends.

Revenue per share has been growing, but margins have been shrinking. The 10-year average gross profit ratio was 28.3%, but in the past year, it dropped to 26.8%, down from over 30% earlier in the decade. These declining margins have negatively impacted earnings per share and free cash flow per share.

While Starbucks boasts high levels of return on invested capital (ROIC), its limited reinvestment of free cash flow—currently at 22%—raises questions about its future growth potential.

Number 4: Wesco International (WCC)

Next, we have Wesco International, an industrial company with a relatively low starting dividend yield of 0.93%. Despite this, the company has shown impressive earnings growth in recent years. From $8.11 per share in 2021, earnings jumped to $15.83 in 2022, a stark contrast to the typical sub-$5 per share range from 2013 to 2018.

Industrial stocks like Wesco tend to be capital-intensive and cyclical. For instance, Wesco’s free cash flow margin—a measure of how much revenue becomes free cash flow—was only 1.79% in 2023, indicating that for every $100 in revenue, only $1.79 was free cash flow. This margin has varied significantly over the past decade, reflecting the cyclical nature of the business.

One positive metric is the company’s dividends and capex coverage ratio, which combines the payout ratio for dividends with capital expenditure coverage. Wesco’s ratio of 3.77 suggests its free cash flow can comfortably cover these costs, a healthy sign for the company’s financial stability.

Number 3: The Walt Disney Company (DIS)

Coming in next is The Walt Disney Company (ticker: DIS). Over the past year, Disney’s stock has gained 22.39%, but its long-term performance is less impressive. Over the past five years, the stock is down 23%, and over the past decade, it has risen just 17.15%, trailing inflation. At its peak, Disney traded near $200 per share, making its recent sell-off significant.

Disney’s challenges are evident in its earnings. In 2019, earnings per share were $6.30, but they turned negative in 2020 due to pandemic-related park closures. Despite the growth of Disney+, the company’s profitability has not fully recovered, with revenue CAGR over the past five and ten years at 5.59% and 6.5%, respectively.

Gross profit margins have also declined. Pre-2020, the gross profit ratio exceeded 40%, but it has yet to recover to those levels post-pandemic. Investors are likely betting on a turnaround, making this a speculative play for super investors.

Number 2: Visa Inc. (V)

Visa, the first financial stock on the list, is also one of the largest holdings in many portfolios. Over the past year, Visa has risen about 22%, with a five-year gain of nearly 69%.

From a dividend perspective, Visa has been exceptional. While its yield is low at 0.75%, the 10-year dividend CAGR is 16.8%, and the 5-year CAGR is 14.1%. In 2014, Visa paid $0.42 per share in dividends, which has grown to $2.36 per share in 2023. Additionally, Visa’s free cash flow payout ratio is a low 22.5%, allowing ample room for reinvestment and share buybacks.

Revenue and earnings per share have grown consistently over the past decade, aligning with the company’s high levels of ROIC. Visa has also been rewarding shareholders with consistent buybacks, averaging a buyback yield of 1.76% in recent years, bringing the total shareholder yield to 2.51%.

Number 1: Microsoft Corporation (MSFT)

Finally, we have Microsoft, the largest individual holding in many portfolios. Over the past year, Microsoft has risen 17.66%, and over five years, it’s up 177%.

While Microsoft’s dividend yield is low at 0.7%, its 10-year dividend CAGR of 9% and 5-year CAGR of 8% demonstrate consistent growth. The free cash flow payout ratio is just 29.4%, leaving ample room for reinvestment. Over the past decade, Microsoft’s free cash flow has grown from $26.7 billion in 2014 to over $74 billion in 2024, a CAGR of 14%.

Microsoft’s strong financials are supported by growing revenue, earnings, and free cash flow per share. Its high ROIC highlights the quality of its investments. With its diversified business segments, Microsoft resembles a mini-ETF, and analysts project continued double-digit growth, reinforcing its appeal as a long-term investment.

Part 1: https://ttm.financial/post/385552158572600

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