Starbucks (SBUX); Valuation finally reaching compelling levels to match 30% annualized dividend increases

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Starbucks’ (NASDAQ:SBUX) dividend increased by 25% with an overall yield just below that of the S&P 500 Index at 1.95%.

Starbucks is the leading retailer, roaster and brand of specialty coffee in the world. The global firm sells a wide variety of beverages and whole bean coffees through its global stores, supermarkets and online. It has 8,875 company-owned stores in the Americas and 3,581 abroad (primarily in Europe and China).

Starbucks’ sales are now over $20 billion a year. Starbucks initiated its first dividend on March 24, 2010, at five cents per share. The new dividend (25 cents) is five times what the firm paid over six years ago. Starbucks indicated it is targeting a consistent dividend payout range of 35% to 40% of net income. Starbucks currently ranks 38th in yield within the large-cap consumer discretionary category. Starbucks has maintained a solid three-year growth rate of dividends of 23.6%. The quarterly dividend for the December payment will be 25 cents versus the prior year rate of 20 cents per share.

Starbucks also released earnings results for the company’s fourth quarter. Net income was $801 million, or 54 cents cents per share. This was an increase of 22% from last year’s net income of $652.5 million and 25% above the 43 cents per share earned last year. Total revenue grew by a solid 16% to $5.71 billion from $4.91 billion in the year prior. This revenue number topped the average analyst estimate of $5.68 billion. However, U.S. sales targets were behind target for the large consumer beverage company. Global same-store sales of 4% missed analyst’s consensus forecasts of 4.8%. But within the Americas, sales went up 5%.

For the first quarter, Starbucks expects EPS of 51 cents to 52 cents. This is three cents below consensus estimates. For the next full year, Starbucks pegs earnings at $2.12 to $2.14, also a few cents shy of consensus view.

On the positive side of the ledger, mobile payments continue to gain more scale. These type of electronic payments rose to 25% of U.S. transactions. This is 25% higher than last year’s number.

The company opened more than 2,000 new stores in the past twelve months. Positive news also came out of Asia, especially the China region where Starbucks is generating a higher 6% same-store growth. Revenue in Asia advanced by a stellar 29% to $839.2 million. Starbucks’ chief operating officer commented on Friday that he expects Starbucks’ outlets in China to supersede those in the United States with over 5,000 stores before 2022.

The dividend will be paid at the new higher rate on Dec. 2 to shareholders of record at close of business on Nov. 17. Starbucks is currently priced at $51.77. Listed in the table below are the quarterly dividend payments since 2010.

Date Quarterly Dividend
Nov. 17  25 cents
Aug. 2 20 cents
May 3 20 cents
Feb. 2 20 cents
Nov. 9, 2015 20 cents
Aug. 4, 2015 16 cents
May 5, 2015 16 cents
Feb. 3, 2015 16 cents
Nov. 10, 2014 16 cents
Aug. 5, 2014 13 cents
May 6, 2014 13 cents
Feb. 4, 2014 13 cents
Nov. 12, 2013 13 cents
Aug. 6, 2013 11 cents
May 7, 2013 11 cents
Feb. 5, 2013 11 cents
Nov. 13, 2012 11 cents
Aug. 6, 2012 8 cents
May 7, 2012 8 cents
Feb. 6, 2012 8 cents
Nov. 15, 2011 8 cents
Aug. 8, 2011 6 cents
May 9, 2011 6 cents
Feb. 7, 2011 6 cents
Nov. 16, 2010 6 cents
Aug. 2, 2010 6 cents
April 5, 2010 5 cents

Analysis of Starbucks Corp. is based upon our five key criteria, which include;

Category Value Score
Dividend Yield 1.95% 306
Dividend Growth (3-6 year avg) 31.9% 40
Forward P/E 21.47 231
S&P Financial Rating A- 120
Beta 0.95 125
Total Score 822

Additional Information on price-sales (P/S) ratio and historical yield:

% Yield 3 Year Div. Growth Rate 6 Year Div. Growth Rate SPS 2016 P/S Ratio 10 yr P/S Low 10 yr P/S High 5 yr lowest Yield % 5 yr max Yield %
1.95% 23.6% 40.3% 14.55 3.56 0.85 4.92 1.01% 1.97%

Final analysis

Positives

  • Starbucks maintains a three-year dividend growth rate of 23.6%.
  • Starbucks maintains a credit rating of A-. This is an investment grade.
  • Starbucks’ current dividend yield (1.95%) is at the top of its five-year average historical dividend yield.
  • Starbucks maintains a beta of 0.95, lower than the average company.
  • Starbucks’s forward P/E ratio is just over 21, a value statistic for a premier growth company.

Negatives

  • Starbucks’ dividend yield is below that of the S&P 500 Index.
  • Starbucks is trading at a higher than average P/S basis.

Overall, our analysis of Starbucks’ third-quarter dividend increase and earnings results are positive. Both revenue and earnings beat forecasts. The large-cap company continues to increase its dividend at one of the highest rates within the sector.

Mobile payments continue to gain steam along with momentous growth in the China region. There are also new paths for Starbucks over the next several years to continue its pace of double-digit growth. One is its new new Roastery stores. The new Starbucks Reserve Roastery stores are dedicated to providing coffee education and availability of their small-lot Starbucks Reserve coffees. The first one opened in Seattle in 2014. Openings are expected in Shanghai in 2017 and in New York City and Tokyo by the end of 2018.

The company is experimenting with new smaller store formats and expanding their food offering to customers. Its rewards program continues to be a strength and builds brand loyalty. Another growth area is the firm’s single-serve coffee division, which includes its VIA product and the company’s K-Cup partnership with Keurig Green Mountain.

All these are strong positive for Starbucks and within the competitive food and restaurant industry, Starbucks stands out as one of the best managed companies that is able to produce strong revenue and earnings growth.

Although its yield is still below 2%, it is now at the upper edge of its historical range and highest since August of 2012. The stock maintains a beta below the market as well, a rarity for a large-cap growth company. Based on its compelling yearly dividend increases, moderate forward P/E, excellent revenue and earnings prospects and high credit rating, Starbucks has entered our Top 100 Dividend Stocks list, replacing Archer Daniels.  If you want to find out if a stock is in our model portfolio please subscribe to our monthly newsletter.  

Starbucks Corp. Dividend Yield Chart (Click to enlarge)

sbux3

Chart Explanation:  Dividend growth stocks may be viewed favorably when the current yield is above historical readings for the past 5 years.

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