Starbucks Stock (NASDAQ:SBUX)
I stopped at Starbucks (NASDAQ:SBUX) to get a dark roast and wondered why I wasn’t a shareholder. Starbucks is everywhere I go in the city, and they are never empty. After reviewing their previous investor day presentations, financials, and recent earnings, I grew more interested in adding SBUX to my dividend growth portfolio. I like three things about SBUX: annual dividend increases, share buybacks, and EPS growth. Coffee isn’t going away, and SBUX’s revenue isn’t limited to its physical locations. Starbucks products may be found anywhere, from the local supermarket to the neighborhood gas station. While the dividend yield is not particularly attractive, dividend growth is enormous, and the capital allocation program is effective. Starbucks stock is on my watchlist because I like what I see.
Starbucks Is Pro-Shareholder and a Capital-Allocation Advocate
Some investors favor dividends, while others prefer stock buybacks. While the debate over which is best for shareholders is debatable, I am a supporter of both. When a company implements a dividend plan, shareholders directly participate in corporate earnings since a portion of the EPS is paid out as a dividend. When a corporation buys back shares, it increases the ownership percentage represented by each share, and each share is associated with a bigger part of the firm’s earnings and revenue.
Since instituting a dividend program, SBUX has been a terrific dividend growth company. SBUX has boosted its quarterly payout by 960% to $0.53 after instituting its first quarterly dividend of $0.05 in the spring of 2010. When it comes to SBUX’s dividend growth characteristics, there isn’t anything to complain about. SBUX has increased dividends for the past 12 years in a row, with a 5-year dividend growth rate of 12.58%. SBUX has a dividend payout ratio of 61.81% based on its estimated EPS of $2.12 per share in 2023. A payout ratio of 61.81% is appealing in terms of dividend growth because it leaves plenty of room for future dividend increases.
For individuals who appreciate share repurchases, SBUX has increased shareholder value by committing a portion of its cash to its share repurchase program on a continuing basis. SBUX has repurchased approximately 360.8 million shares since the end of the 2013 fiscal year. SBUX has reduced its share count by approximately -23.94% over the last decade by allocating billions to share repurchases. Long-term stockholders have gained significantly as SBUX shares have increased by 201.40%. Share repurchases have contributed to capital appreciation by spreading EPS across fewer shares, which has assisted with quarterly EPS beats while also increasing shareholder ownership.
SBUX’s dividend yield of 2.17% isn’t enough to pique my curiosity on its own, but when I consider the capital allocation program as a whole, SBUX is extremely intriguing. Management has demonstrated a strong commitment to creating shareholder value by increasing dividends annually for the previous 12 years while lowering outstanding shares by nearly a quarter over the last decade. Observing this combination tells me that management is concerned about shareholder interests and takes capital allocation seriously. SBUX CFO Rachel Ruggeri announced at the 2022 Investor Day that SBUX would earn more than 25% return on invested capital (ROIC) by the 2025 fiscal year while maintaining a 2% dividend yield and constantly devoting funds to share repurchases. While previous performance does not guarantee future success, I take the CFO’s future estimates seriously because SBUX has a good capital allocation program.
Starbucks Is Still Growing and Has Big Ambitions for the Future
While Howard Schultz was not the originator, he was instrumental in shaping SBUX into what it is today. Mr. Schultz was appointed as SBUX’s marketing director in 1982 and purchased the company from its founders in 1987. SBUX expanded from less than 20 stores to more than 100 in the first four years under Mr. Schultz’s leadership. SBUX has 35,711 outlets across company-operated and licensed sites at the end of the fiscal year 2022. The most intriguing feature is that the worldwide expansion has surpassed the North American section, with 18,416 locations globally and 17,295 domestically. In 2022, its company-operated outlets contributed 82% of revenue. Many adults, including me, are coffee addicts. The part of SBUX that I enjoy best is that customers can visit venues to buy coffee in the present, but they can also get goods like the ground or whole-bean coffee for home use. The US coffee market was predicted to be $85.2 billion in 2022, with the following 11 countries’ coffee markets generating between $10 and $40.2 billion in yearly sales.
SBUX has handled the pandemic admirably, and it will be profitable even in 2020. SBUX’s top line has increased by 37.54% during the last five years, while its gross profit has increased by 22.01%. Its gross profit margin is below the magical 40% figure that Mr. Buffett seeks, but brick-and-mortar businesses face additional expenditures that make it more difficult to earn higher levels of gross profit. While rising commodity prices and inflation have had an impact on many organizations, SBUX has only seen a -3.34% decrease in its gross profit margin in the TTM compared to the 2018 fiscal year. SBUX consistently generates profits and has generated $3.55 billion in net income and $2.75 billion in FCF in the TTM.
SBUX intends to maintain its forward growth and raise its earnings per share (EPS). SBUX expects comp growth and store growth to contribute to improved margins and future EPS growth through its disciplined capital allocation process. SBUX expects 7-9% annual comp growth in company-operated stores from 2023 to 2025, including 7-9% in the United States and 4-6% in China. SBUX expects annual net new store growth of 7% globally, with 3-4% in the United States and 13% in China. SBUX anticipates that this will result in 10-12% yearly revenue growth internationally. SBUX has a track record of exceeding expectations and anticipates that its margins will rise over the next three fiscal years, which, when paired with 10-12% annual sales growth, would create 15-20% EPS growth.
The analyst community appears to concur with the estimates, predicting EPS growth until 2025. SBUX generated $2.85 in EPS in 2022, and 29 analysts predict that SBUX will generate $3.43 in EPS in 2023. This would represent a 20.35% increase in earnings per share year over year. There are 30 experts that believe the EPS for 2024 will be $4.10, representing a 19.53% increase year on year. For the fiscal year 2025, 25 experts predict that SBUX will earn $4.82 per share, representing a 17.56% year-on-year increase. Analysts predict that SBUX EPS will expand at a 19.15% yearly rate over the next three years. This gives SBUX a P/E of 29 based on 2023 EPS, 24.27 based on 2024 EPS, and 20.64 based on 2025 EPS. This also does not account for the effects of stock buybacks or SBUX outperforming expectations. SBUX appears quite interesting at 20.64x 2025 EPS.
Conclusion
SBUX has been a champion of returning capital to shareholders while remaining devoted to brand growth. It’s difficult for me to find flaws because it has everything from top-line growth to expanding EPS while buying back shares and paying out a dividend. I don’t think SBUX is that costly at 20.64x 2025 EPS, especially because they intend to continue allocating resources to buybacks on a yearly basis. SBUX, in my opinion, is one of those companies where long-term investors will profit from capital appreciation and dividend growth. I’m becoming really interested and will be keeping a careful eye on Starbucks stock over the next few weeks. I’m interested in seeing if the downtrend has been broken or if shares attempt to retrace toward the $90 level.
Featured Image: Unsplash @ June Andrei George
