Will Starbucks Corporation Raise Its Dividend in 2018?
January 24, 2018
Checking in on Starbucks’ Dividend
Starbucks Corporation (NASDAQ:SBUX) has a reputation as a hot growth stock, but that could be about to change.
Last quarter, management dialed back their expansion plans. That move signaled Starbucks might no longer be the fast-growing business it once was, which sent shares plunging in after-hours trading.
The company, though, seems to be aging gracefully. In the same report, Starbucks raised its quarterly dividend 20% to $0.30 per share. CEO Kevin Johnson also announced plans to return $15.0 billion to shareholders over the next three years, mostly through of combinations of dividends and buybacks.
None of this should worry shareholders. Like a young man hitting middle age, growth at every company eventually slows down. During these periods, it makes sense drop the late-night club scene for earlier dinner parties.
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Or in the case of businesses, focus on expenses and pay out higher dividends for shareholders. As the coffee colossus pays out more money to shareholders, this business could emerge as a cash cow. Dividend investors should take note for a couple of reasons.
The payout looks rock solid, first off.
Starbucks is arguably underleveraged, as it has little debt, below-average business risk, and ample free cash flow. Management’s aggressive dividend policy looks like a step toward leveraging the company’s balance sheet for better returns–”making the equity sweat,” as they say in industry circles.
The primary risk here is the economy. Given the company’s position as a luxury brand, profits could get clipped in the event of a recession. But with a payout ratio below 50%, management has plenty of wiggle room to survive a bad year or two.
Moreover, this dividend will likely grow in the years to come.
Management has several avenues to grow earnings, which include China, digital innovation, and daypart expansion (industry lingo for “selling more beverages in the afternoon and evenings”). Johnson also wants to rationalize overhead costs, as well as divest underperforming business lines.
Looking forward, executives wants to grow same store sales by three to five percent each year. Analysts project that will translate into earnings per share growing at a 12% annual clip.
Most of those profits will likely get returned to shareholders. Management has gotten into the habit of raising the dividend in the fourth quarter of each year. So short of a major problem, shareholders can expect another bump in the latter half of 2018.
These measures could turn Starbucks into a cash machine.
Today, the company stock pays out only two percent. That won’t impress most income hunters, who can earn better returns elsewhere.
But let’s assume Starbucks can increase its dividend at a 20% compounded annual clip over the next 10 years. This looks reasonable, given the company’s low payout ratio and modest earnings growth rate. Our yield on cost rises into the mid-teens by 2028, creating quite a stream of cash flow.
Starbucks is no longer the hot growth stock it once was. But as the company transitions into middle age, this could turn into quite the source of income. Dividend investors skipping over this name now might kick themselves later.
