Starbucks Corp (NASDAQ:SBUX) experienced a quiet 2023, lagging behind the broader market rally and showing a 3.2% decline for the year. As 2024 unfolds, while the S&P 500 Index ($SPX) achieves new highs, SBUX remains in negative territory on a year-to-date basis. In the wake of this pullback, with its 2.43% dividend yield, the question arises: Is Starbucks stock a smart buy at this juncture? We delve into the coffee giant’s recent price trends, financial performance, and analysts’ outlook to find the answer.
Why is Starbucks Stock Retreating?
Despite a relatively modest year-over-year dip, SBUX has retreated significantly from its 52-week high of around $115, marking a decline of over 19% since last May. This downtrend stemmed from a disappointing outlook accompanying the fiscal Q2 earnings report. Although the stock rallied in November after surpassing fiscal Q4 earnings expectations, it has retraced to fill that bullish gap. Starbucks, with a current market cap of $106.7 billion, faces headwinds but remains an established dividend stock.
Dividend Appeal Amid Price Action
Starbucks, while exhibiting less-than-impressive annualized returns, has built a reputation as a reliable dividend stock. Presently offering a quarterly dividend of $0.57 per share, equating to a forward yield of 2.43%, Starbucks has demonstrated over a decade of consistent dividend growth. With a reasonable payout ratio of 60% and a robust and expanding free cash flow, the stock could attract investors seeking income and potential capital appreciation.
However, despite its dividend allure, SBUX is not positioned as a cheap stock. Valued at 2.70x forward sales and 22.79x forward earnings, it carries a premium compared to consumer discretionary sector medians.
Growth Prospects for SBUX
Starbucks may be on the verge of a comeback, driven by strategic initiatives. The company’s expansion plans in India could boost revenue significantly, tapping into the country’s growing coffee culture. Moreover, menu diversification, especially after a 20% sales increase in the all-day breakfast menu during the first nine months of 2023, might contribute to growth.
Projections indicate that Starbucks will outpace sector peers in terms of growth this year, with forward revenue growth at 10.40% compared to the sector median of 5.23%, and EPS growth at 26.5% against a sector median of -1.74%. However, it faces challenges such as rising costs related to labor, commodities, and supply chain issues, along with concerns about consumer spending amid high inflation.
Starbucks is set to report earnings later this month.
Analyst Sentiment and Target Price
Out of 24 analysts covering SBUX, the consensus leans toward a “moderate buy,” with 10 advocating a “strong buy,” 1 suggesting a “moderate buy,” and 13 recommending a “hold.” The average target price from this group is $111.90, implying a 20% upside potential from current levels.
Conclusion
While Starbucks stock faces challenges, strategic moves, and positive analyst forecasts hint at a potential rebound. Whether viewed for growth or a reliable dividend, Starbucks may still hold promise. With an earnings announcement approaching, conservative investors might consider waiting for event-related volatility to settle before evaluating the stock for investment.
Featured Image: Unsplash
Author Faith Yakubu 
