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Starbucks' Dividend Increase Comes Early: What You Need to Know

By Daniel Sparks – Jun 24, 2018 at 8:46PM

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The coffee giant's stock may have taken a hit, but its dividend yield is looking very compelling.

Last week, coffee giant Starbucks (SBUX -0.47%) gave investors a few reasons to be disappointed, including a lowered outlook for its global third-quarter comparable store sales growth and softer-than-expected Frappuccino sales. As a result, shares fell sharply, ending the week down more than 10%.

While the double-digit pullback is undoubtedly disappointing for Starbucks stock holders, one group of investors may find a silver lining in the coffee giant's update on its business last week: dividend investors. Not only did Starbucks announce a significant dividend increase, but this dividend increase came earlier than usual.

Starbucks Unicorn Frappuccino.

Image source: Starbucks.

A close look at Starbucks' dividend increase

As part of its updated strategic plans announced last week, Starbucks also said it is increasing its target for cash returned to shareholders through fiscal 2020 by $10 billion, to $25 billion. The higher target reflects more confidence from management in the company's ability to "improve the return profile" of its business, management said in a press release about the strategic changes.

While most of this $25 billion will likely go to more share repurchases, Starbucks is also getting aggressive with its dividend. Starbucks said it is increasing its quarterly dividend by 20% to $0.36, up from $0.30 previously. The sharp increase maintains the company's 20% dividend growth last year. This time around, however, Starbucks' dividend increase is coming one quarter ahead of schedule. Since 2011, Starbucks has increased its dividend around the end of November every year. But Starbucks' just-announced dividend increase is payable on Aug. 24.

The dividend increase extends Starbucks' growing track record of strong dividend growth. Over the past five years, Starbucks dividend has increased at an average rate of 24%. Further highlighting Starbucks' dividend's robust growth, the coffee company's dividend has more than doubled since 2015.

More growth ahead

Starbucks' announcement of an early dividend increase strengthens the case for owning the stock for its dividend income.

Despite Starbucks' aggressive dividend increases recently, the company still boasts a low payout ratio of just 36%. With dividends paid representing such a low percentage of Starbucks' net income, the company has plenty of room for more dividend increases.

And investors should keep in mind that Starbucks' earnings are growing nicely. In the company's most recent quarter, Starbucks' non-GAAP earnings per share increased 18% year over year. Further, management expects Starbucks' non-GAAP earnings per share for fiscal 2018 to rise about 17% year over year. 

Combining Starbucks' low payout ratio with its rapidly rising earnings, management can easily afford to continue to be aggressive with its dividend increases in the future.

Meanwhile, Starbucks investors who buy today get a nice dividend yield of 2.2% -- up from a dividend yield of just 1.6% one year ago -- thanks to the stock's underperformance recently. Of course, the company's forward dividend yield, or its expected dividend payments over the next 12 months as a percentage of today's stock price, is a sweet 2.8%.

While Starbucks stock is trading lower after shares took a beating last week, the company's dividend yield is at an all-time high -- and Starbucks' healthy underlying business looks poised to support dividend growth for years to come.

Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool has a disclosure policy.

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