Better Buy: Starbucks Corporation vs. Dunkin' Brands Group

By Markets Fool.com


Image: Starbucks.

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Coffee is a way of life in the U.S., and companies that cater to coffee drinkers have become extremely successful. Starbucks has revolutionized the coffeehouse industry, and it has become a worldwide giant with products ranging from raw coffee to home brewers and a variety of different types of food.

Dunkin' Brands , on the other hand, has gone beyond its traditional focus on donuts to offer customers coffee and other food and beverage items. Investors looking at getting into the space are curious which stock is the better buy right now. Let's look at how Starbucks and Dunkin' Brands compare on some key metrics to see which one might be a smarter pick for investors.

Valuation
Starbucks and Dunkin' Brands have seen their shares go in different directions lately. Since March 2015, Starbucks is up 23%, while Dunkin' Brands has dropped about 3%.

Ordinarily, you'd think that opposite moves in shares would create potential valuation disparities; but comparing the two coffee companies based on simple valuation metrics produces mixed results. When you focus on trailing earnings, Starbucks fetches an earnings multiple of 36, which is relatively high, and reflects its growth. However, Dunkin' Brands weighs in with an even higher trailing multiple of 42.

Forward earnings estimates look a lot different for the two companies. Dunkin' Brands' forward earnings multiple is just 19, compared to 27 times forward earnings for Starbucks. If you believe that those forward estimates are likely to be true, then it looks like Dunkin' Brands has a slight advantage from a valuation standpoint.

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Dividends
Dividend investors prefer high-yielding stocks, and on this metric, Dunkin' Brands comes out on top. The donut chain features a current dividend yield of 2.6%, which is almost double the 1.35% yield that Starbucks pays.

Much of the difference between the two stocks comes from disparities in payout ratios. Starbucks' payout ratio is just 42%, giving the company a lot of latitude for future increases. Dunkin' Brands payout ratio of 98% is much more constrained, although if long-term earnings revert to a more anticipated trajectory, that payout ratio could fall quickly.

Both companies have a short history of paying dividends, but they've ramped up their payouts quickly. Dunkin' Brands went public with a $0.15 per-share quarterly dividend, and it has since doubled that payout to $0.30 per share. Starbucks has made similar moves, going from just $0.05 per share in 2010 to quadruple its payout to $0.20 late last year. Dunkin' Brands gets the nod based on current yield, but investors can expect Starbucks to close the gap in the future.

Growth
The big question for both Starbucks and Dunkin' Brands is how their growth efforts will go. For Dunkin' Brands, financial results for 2015 included a sluggish 1.4% rise in comparable-store growth for its Dunkin' Donuts unit. A major impairment in its Japanese business pulled down net income for the year, but on an adjusted basis, earnings per share rose 11% on an 8% rise in overall revenue.

The company opened almost 500 new restaurant locations worldwide, and CEO Nigel Travis noted that Dunkin' Brands intends to put together a strategic plan to improve the guest experience with innovative products and service offerings such as mobile ordering. Investors expect growth of about 13% annually from Dunkin' Brands over the next five years.

Starbucks, meanwhile, has investors even more excited about its future prospects. Expectations are for the coffee giant to grow at an 18% clip over the next five years, and its recent numbers have been strong. In its fiscal first quarter, comparable sales rose 8% worldwide, with matching performance in the Americas segment.

Operating income and adjusted net income both climbed 16% from the year-ago quarter, and the company opened more than 500 new stores just in the most-recent quarter, setting a new record. Between participation in the Starbucks rewards program, channel expansion beyond the namesake branded coffee shops, and traffic that included growth of 23 million customer interactions, Starbucks expects revenue growth of more than 10% for the coming year, and more than 1,800 new stores to open.

Despite its larger size, Starbucks offers investors a more-compelling growth story than Dunkin' Brands. However, Dunkin' Brands stock arguably trades at a more attractive valuation, and has more to offer dividend investors right now. Depending on what your priorities are, reasonable investors could disagree about whether Dunkin' Brands or Starbucks is currently the better buy.

The article Better Buy: Starbucks Corporation vs. Dunkin' Brands Group originally appeared on Fool.com.

Dan Caplinger owns shares of Starbucks. The Motley Fool owns shares of and recommends Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.