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Is Starbucks a Buy Now?

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Glory be, Starbucks (Nasdaq: SBUX  ) has initiated a quarterly dividend of $0.10 per share! The company, often prodded for its once-rampant overexpansion, has finally signaled that it's slowing its growth. But is that a good move for investors?

In a word, yes.

The dividend announcement came as the company, led by founder and CEO Howard Schultz, outlined its strategy for global growth. A leaner and refocused Starbucks appears ready to engage in profitable expansion. Kicking off a dividend only reinforces Starbucks' apparent confidence in its future profitability.

The company also upped the number of shares it could repurchase by 15 million (or 2% of shares outstanding), atop the 6 million still left on its previous repurchase agreement.

"Dividend" means "shareholder-friendly"
As for the dividend, Starbucks promised a fairly robust payout. At current stock prices, the annual yield comes out to 1.6%. The company has promised to distribute 35%-40% of its net income as dividends in the future, which would evidently leave it enough capital to continue expansion. The current dividend sits squarely in that range, given analyst expectations for this fiscal year.

However, it should be noted that Starbucks expects to generate free cash flow of around $1 billion for the year ending September. That would outpace expected net income of about $825 million. So it appears that Starbucks would still be pulling in another $175 million in cash above its reported income, giving the company an abundant cash cushion. Starbucks already has a nice cash pile of $1.36 billion (against $550 million in debt).

By launching this dividend, Starbucks joins other consumer-focused names that return stacks of cash to investors, including McDonald's (NYSE: MCD  ) , Procter & Gamble (NYSE: PG  ) and Yum! Brands (NYSE: YUM  ) . Some analysts speculate that Starbucks' high-profile announcement could pressure other prominent cash-rich companies, including Apple (Nasdaq: AAPL  ) and eBay (Nasdaq: EBAY  ) , to start their own payouts to shareholders.

Global growth
As Starbucks starts its new life as a dividend-paying company, it will need to continue its assiduous focus on solid growth and cost-cutting. Since Schultz's return to the CEO role in January 2008, the company has shut roughly 900 locations and removed some $600 million in costs from the business, even as it improved customer satisfaction.

When I spoke with CFO Troy Alstead a couple of months ago, he outlined the company's strategy behind its European operations, which have been restructured for greater cost-effectiveness, and its push into China. The company sees opportunity for profitable growth in both markets, despite the legions of jokes surrounding its seemingly omnipresent stores.

In the next few months, Starbucks is also introducing its Via instant coffee on a global scale, to some 30,000 points of distribution. Schultz also noted that Starbucks has plenty of room to grow; in retail, it "has less than four percent of the U.S. coffee market and less than one percent of the global coffee market."

Furthermore, its U.S. locations have seen a nice turnaround lately, with same-store sales up 4% in the most recent quarter. That's the company's first quarterly gain in two years.

The Foolish quotient
Starbucks will certainly need that growth if it wants to be a dividend darling. And although it may never reach the juicy yields of a company like Altria (NYSE: MO  ) , Starbucks' slowing growth could reveal just how much cash the coffee giant really can generate. (Namely: a lot.)

Is Starbucks a buy at current levels? The stock's trading at about 17 times free cash flow, while analysts expect about 16% annual earnings growth over the next five years. That certainly isn't cheap, even given its growth expectations. But Starbucks' commitment to its dividend, which shows concern for shareholders, should give you some security in the health of its operations going forward.

Despite the nice dividend (and especially what it represents), I just wish that the stock price gave me more of a sure gain and greater downside protection. Still, you could do a lot worse, given the junk that's rallied in this market.

Looking for good companies who properly incentivize their managers to boost your returns? I've got some to watch out for.

Jim Royal, Ph.D. owns shares in Procter & Gamble. Apple, eBay, and Starbucks are Motley Fool Stock Advisor recommendations. Procter & Gamble is an Income Investor recommendation. Motley Fool Options has recommended a bull call spread position on eBay and Yum! Brands. The Fool owns shares of Procter & Gamble. The Fool has a disclosure policy.

Read/Post Comments (7) | Recommend This Article (22)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 24, 2010, at 6:27 PM, plange01 wrote:

    nothing has changed for starbucks its still a bankruptcy in the making...

  • Report this Comment On March 24, 2010, at 8:57 PM, stockju wrote:

    We think Starbucks is a buy with a price target of $30. Let us look at some positives of SBUX -

    a) Revenue growth of Starbucks has been above the industry average.

    b) Great improvement of EPS over last quarter, 0.20 Vs 0.32. Forecasted profitability is also high.

    c) Net operating cashflow increased by almost 10% when industry average cash flow growth was negative.

    d) Low financial leverage

    Having mentioned a few positives, the company suffers from low net profit margin and high EPS variability.

    Starbucks is also trying to tweak its image.. do you see $1.50 coffee placard outside starbucks? it is a strategy to attrack the next batch of customers who are willing to pay 50 cents more for experience. This is a company that has a high quality product and does not fear innovation.

    We feel positives far outweighs negatives of the company.


  • Report this Comment On March 24, 2010, at 9:00 PM, stockju wrote:

    bankruptcy for this company is a distant scenario is my opinion. although, the success of this company depends on customer retention and ensuring a rewarding experience. Frankly, many competitors are not even closer..


  • Report this Comment On March 25, 2010, at 10:23 AM, Laustcozz wrote:

    Starbucks is going to get slaughtered over the next couple quarters. McDonalds has ramped up their cheap fancy coffee offerings which is really going to bring some competition. Meanwhile milk and, even more so, sugar have gone through the roof. They have dropped their inventory to historic lows and are now going to have to replace it at rising prices. I think bankruptcy is a good ways off...but I would guess adding a dividend is just to fight the sell-off that they know is coming.

  • Report this Comment On March 25, 2010, at 10:44 AM, SUPERMANSTOCKS wrote:

    If you have to ask if AMD or SBUX is a buy now again and again then you need to rethink the way you do business. Of course its a buy!

  • Report this Comment On March 25, 2010, at 12:39 PM, bluepennyinvest wrote:

    " it should be noted that Starbucks expects to generate free cash flow of around $1 billion for the year ending September."

    yes, it's so right.

  • Report this Comment On March 25, 2010, at 12:58 PM, redsleek wrote:

    @Laustcozz - Companies are not gonna give out dividends if they are wanting to declare bankruptcy. The court will never approve this.

    Obviously, SBUX has grown its cash reserves and its marketing is starting to pay off.

    Since they are buying back their stock, they may be giving out a dividend to keep their stock deflated until their buyback program is complete.

    They may also be giving out dividends because they are not interested in growth but value.

    I am buying SBUX on the next market dip.

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