Corporate Governance
Starbucks Corporation was founded in 1985 from what was previously known as Starbucks Coffee Company. It has now grown to become America’s premium coffee and teahouse with a global name due to its operations around the globe. Since its formation, Howard Schultz who is the current chief executive officer of the company has been leading the Corporation. Schultz has previously held the position of the president of the company.
He took over the executive role of the company in the year 2008. He has since been the president of the company as well as the chief executive officer (Starbucks Corporation 8). Starbucks Corporation is a publicly listed company that trades its common stock under the name ‘SBUX’, which trades on the global share market scene because it is a global brand with outlets in over fifty countries around the globe. Mr. Schultz has come in as the chief executive and a founder member of the company as well as an insider who has held different portfolios within the company. In the past year, he has earned a salary, which comes as compensation of $1482692.
He has stock options within the company that come to around 9,602,089 shares, which translate to a monetary value of about $291, 529, 850 thus making him the highest shareholder within Starbucks Corporation. His total compensation translates to $28, 909, 773 per year. According to the 2012 report, Starbucks Corporation has a seven-member board team that includes the president and the chief executive officer (9).
Other members of the board and their portfolios include Cliff Burrows who is the president of Starbucks coffee in the United States of America. He joined Starbucks way back in the year 2001. Therefore, he has served the corporation under different portfolios up to date. John Culver is the president of Starbucks in China and Asia pacific. He joined Starbucks way back in 2002. He has thus served the company under different portfolios especially on the international front. Mitchell Gass is also a board member and the President of Starbucks coffee EMEA. She has been at Starbucks since 1996. She has also served the corporation under different portfolios.
Jeff Hansberry is the president of channel development and emerging brands. He joined Starbucks in the year 2010. However, before joining Starbucks, he had worked with different multinationals in different positions. Troy Alstead is the chief financial and administrative officer who has been at Starbucks since 1992. He has served on the board of the corporation in different capacities since then. Lucy Lee Holm is the executive vice president, general counsel, and Secretary. She has been at the company since the year 1999 leading the company’s legal team in dealing with legal matters that arise (Starbucks Corporation 8). The members of the board are not related in any way.
Only work brings them together. Most of the directors work exclusively for Starbucks. They have specific roles to play in the running of the corporation. They have been made to head different portfolios besides being responsible for different global markets. It can therefore be said that all directors are employees of Starbucks. The shareholding structure indicates that most of the directors are the major direct shareholders with Schultz leading with over 18million shares. On the other hand, the largest shareholding at Starbucks is the corporate investors who in total own up to 74% of the shares at Starbucks corporation.
The shareholding structure at Starbucks is in three categories: direct holders, institutional holders, and mutual fund holders. Institutional fundholders and mutual fund holders are the largest shareholders in a corporation. Some of the directors hold some shares on behalf of other shareholders. Starbucks’ financial performance on the stock exchange is healthy as compared to the overall industry performance. Whereas the industry performance price-earnings are at 18%, Starbucks performance is rated at 26%.
Stockholder Analysis
The company has three types of stockholders namely direct shareholders, institutional shareholders, and mutual fund holders. Institutional shareholders are the biggest shareholders in the company with FMR LLC-35,593,475, Price T Rowe Associates- 343,454,008, Vanguard Group Corp- 33,027,380, State Street Corp – 28,566,744, and Barclays Global Investors UK Holdings LTD- 19,898,880 as the top five institutions.
On the other hand, Howard Schultz is the largest direct shareholder in the corporation with over five million shares. He is one of the insider shareholders with his shares averaging 2% of the total stock value of Starbucks Corporation. Other directors are also some of the large direct shareholders in the corporation. Mutual funds are also some of the large shareholders in the corporation by sharing the remaining 26% of shares with direct investors, therefore, making institutional shareholders the largest at the company with shares totaling 74% of all the shares. The board of directors is made up of some of the top direct shareholders of the company who run the company.
The majority of shareholders running the company include the chief executive officer who doubles up as the president as well as other directors who are referred to as insider officers who trade massively the shares of SBUX at the stock exchange. Starbucks has a total of 18500 shareholders who can be described as direct shareholders and not nominee shareholders (Starbucks Corporation 19). The power to vote is vested in the shareholders with each share being viewed as a vote.
Risk and Return
The historical risk parameters at Starbucks have been low due to the approach the management has put in place. Thus, the company has not so far faced major problems in terms of risks that can affect it financially. The low-risk factor can be indicated by a beta of 1.2 that has been consistent for the last five years of trading. This situation, therefore, has secured Starbucks’ assets against any adverse effect that can easily affect the company. According to the Starbucks 2012 report, Starbucks has a risk management policy that allows the corporation to quantify risks and plan for their mitigation processes (Starbucks Corporation 10).
This strategy allows the company to predict risk factors and or put in place measures for taking care of the risk. Some of the risks that Starbucks has highlighted are “commodity price risk, foreign currency exchange risk, equity security price risk, and interest rate risk” (Starbucks Corporation 19). Most of these risks are due to fluctuations in the different sectors that affect Starbucks directly. Starbucks’ beta is stable. It has been recently quoted at a change of +1.24, which translates to a percentage change of +2.17%. Starbucks stocks have a very low-risk factor. They are described at the market as being bullish. The risk factor for Starbucks is rated as average due to its huge capital base and ability to raise capital for expansion. Currently, the shares of SBUX are trading live at 58.26 per share, which is a 1.2 rise.
Measuring Investment Returns
Starbucks’ investment returns are good because, under all its operations, it has not recorded any losses in all its outlets. This remark can be seen when the previous year’s performance is compared to the current performance. For instance, there has been a rise in the net revenue of the company from $11.7 – $13.3, which translates to a 1.6 billion improvement. The operating income has greatly improved from $1.6 million to $1.9 million, which is indicative of growing returns (Starbucks Corporation 50).
According to the SBUX annual report of 2012, the company had made a $13.3 billion return, which translates to a 14% increase. Starbucks Corporation is a global brand that had a $13.3 billion consolidated revenue growth, which is a 14% increase in its total earnings while at the same time having a 7% growth in its total revenue growth. The operating income of the corporation was $2billion for 2011-2012, which translates to a 16% increase with an operating margin rise to 15%.
Capital Structure Choices
The type of capital structure that SBUX has employed is hedge funding in such a way that the company borrows funds from financiers, which is repayable over a long period at lower interest rates than the current rates on the market to cushion the company against market forces fluctuations that may affect prices of its commodities. According to the year ended 2011-2012 report, the company had long-term credit obligations totaling around $ 549 million against an asset base of around $ 8.2 billion with a shareholder’s equity of around $5.1 billion. The capital structure adopted by Starbucks Corporation is majorly a share equity-type where the shareholders are the biggest providers of capital for investment.
According to the Starbucks 2012 annual report, the company did not have any short-term borrowings as evidenced in the financial statement of the year 2012 (Starbucks Corporation 22). The company, therefore, faces low marginal tax rates due to the long-term debts as indicated on the financial statement of the year ended 2012. The Choice of long-term debts is good for the company because the liability is spread over a long period thus allowing the company to reinvest the revenues it makes into other expansion programs.
Optimal Capital Structure
The cost of capital for the firm as calculated at the moment runs to 15.9 as calculated by weighted average methods and 14.46 as calculated by the capital asset pricing method. As the debt ratio increases, the cost of capital goes up due to the need to make more money to cover the rising debts. The rise in the debt ratio puts a company at the risk of bankruptcy in case it fails to manage its debts. At the same time, a lower debt ratio reduces the cost of capital in that the company will not have to raise so much equity to counter the high debt. It will thus remain in a safe position. The value of the firm will rise if the company moves to its optimal because it will not have debts to take care of.
The revenues made will all belong to the company. They will also increase the dividend expected by shareholders because there will be more money in terms of profits that will be remaining within the company. In most cases, where the company has debts, profits are the ones usually used for paying the debts thus leading to a very low dividend declaration, or none at all. In the case of Starbucks, the debt ratio to capital is low in that it has low debts that do not have a big impact on its capital base. The debt is manageable in simple terms. When compared to other firms in the market, Starbucks’ statement can be described as a healthy one because other firms’ debt ratios are very high.
Mechanics of Moving to the Optimal
The firm should take a gradual move to the optimal instead of an immediate move because the company is still growing its global base and it needs the equity for reinvestment. According to the 2012 report, currently, the company has long-term debts of up to $5 billion, which have allowed it to expand and grow its services in the market (Starbucks Corporation 22). Rushing to clear this long-term debt might affect the company financially because the terms of the debts are conducive to allowing the company to work using other people’s money (Alden Para. 1). At the same time, the repayment schedule that is spread over ten years is favorable to the company. Thus, it should not rush to move to the optimal since it may also expose the company to some unforeseen risks due to the fluctuating market conditions, which have been covered by the company using its borrowings.
Dividend Policy
The company’s dividend policy is that the boards of directors are the sole decision-makers on issues to do with dividends to be paid and at what rate. The company has been paying dividends to its shareholders for the past five years. The dividend rates were based on the share rate at the time of declaring the dividends. According to the 2012 Report, the dividend declarations have always been done quarterly. The rates have always been at around 0.17 with a high of 0.21 and a low of 0.13 (Starbucks Corporation 19). The dividend rate declared is usually based on the high and low performance of the share depending on how the share is performing in the market.
The company uses this guiding policy along with other federal rules to declare the dividend it is going to pay out to shareholders. On several occasions, the company has repurchased shares to the tune of up to 10million shares in one instance. Depending on the market situation, the board usually decides on this matter before the shares can be repurchased. Dividends are only paid to shareholders if the company feels it is financially safe to do so because, when the company has investments to make and other financial obligations to take care of, the dividends will not be paid. On the other hand, the company has also employed a share split policy instead of paying dividends especially when the share prices rise when there is a need to moderate them.
Therefore, the company usually splits shares in terms of 1for 2. This policy though is not common with the company because the last time there was a share split is back in the year 2005 when it remains the board’s decision to make. The board, therefore, makes almost all decisions on matters to do with shares as long as the decisions are within the law and or are good for the company.
A Framework for Analyzing Dividends
Starbucks is a company that is still growing to date. It has recorded an average of 12% growth over the last seven years. Over the last year, Starbucks’ revenue has been much higher than the cash flow. Whereas the revenues have been high up to about 12 billion, the cash flow has been to the low levels below 3 billion over seven years. This case means that the available cash for dividends is much lower than the revenues projected.
The company stocks are also viewed to be very expensive at a price of over $53.3 per share. Starbucks has reported a dividend percent ratio to earnings at about 40% of their earnings compared to other companies that put it at just 2% or 3%. Their dividend rates have been at 0.17 dollars per share, which translates to a 1.29% dividend yield. The company has spent more money on share repurchase, which according to analysts, the money should have been used to pay out dividends to shareholders. The rate of 1.29% as the dividend yield is still low concerning the value of the share of the company at the stock exchange (Alden Para. 2). The corporation remunerated $390 million for dividends compared to $321 million in share repurchase in the year 2011-2012. Therefore, the company lays more emphasis on share repurchasing than on dividend payments.
Works Cited
Alden, Matt. (2012). Starbucks: Substantial Optimism is Factored in. Web.
Starbucks Corporation. Starbucks Corporation Fiscal 2012 Annual Report. London: The Free Press, 2012. Print.