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Starbucks Tells Investors to Expect More Cash Returns

By Demitri Kalogeropoulos – Updated Nov 11, 2019 at 4:35PM

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Faster growth in China and the U.S. bodes well for shareholder returns.

Starbucks (SBUX 0.06%) last week went a long way toward easing investor concerns about the business by closing out a banner fiscal 2019. Sure, the coffee giant posted a rare profitability decline as it spent more cash in areas like technology, labor, and data management. But that earnings trend is set to flip in the coming year with support from market-thumping customer traffic growth in key geographies like the U.S. and China.

In a conference call with Wall Street analysts, CEO Kevin Johnson and his team explained the reasoning behind that ambitious 2020 outlook, and below we'll look at a few highlights from that presentation.

A coffee cup and coffee beans on a wooden table.

Image source: Getty Images.

The key growth drivers are working

[F]iscal 2019 was a very good year for Starbucks, financially reflecting sustained upward momentum in our business.
-- CFO Patrick Grismer

The fourth-quarter results reflected growth contributions from each of Starbucks' core profit engines. The U.S. business reached its fastest expansion place in over two years thanks to a 3% customer traffic boost in an environment where peers like Dunkin' Brands and McDonald's are struggling with reduced traffic. China, likewise, accelerated sales gains at existing locations even as the store base shot higher by 17%.

The gains should be relatively easy to extend, executives explained, since they came mainly from Starbucks' beverage platform. Popular cold-brew drinks are helping lift customer traffic both in breakfast hours and later in the day. "We have strong evidence that our [growth] approach is working," Johnson said.

The earnings profile is strengthening

Our fiscal 2019 results not only reinforce our confidence in the strategies we are implementing to grow the business, but also demonstrate the robustness of our long-term double-digit [earnings per share] growth algorithm.
-- Grismer

Starbucks reported an almost 1-percentage-point decline in operating margin this year, but executives said there was significant noise in that metric. After accounting for unusual charges like restructuring and tax reform, non-GAAP margin would have inched up by 0.4 points, or just slightly below the top of management's target range of between 17% and 18% of sales.

That's a huge win considering how much cash the company allocated toward growth initiatives. It points to robust earnings growth ahead, too. "We are confident in our ability to deliver ... modest margin expansion," Grismer said, "even as we continue to invest for the long term."

Capital returns

In the fourth quarter, we returned nearly $3 billion to shareholders through a combination of share repurchases and dividends, bringing our full-year shareholder capital returns to $12 billion.
-- Johnson

A major benefit of Starbucks' more efficient growth machine is that it produces loads of excess cash that management has promised to direct toward investors. The restaurant stock's $12 billion of dividend and stock repurchase spending last year, in fact, pushed returns to $21 billion in the last two years, with just $4 billion remaining to reach its three-year target by 2020.  

Investors have every reason to expect a similarly ambitious return plan to replace that one sometime over the next year. Starbucks got the ball rolling on the capital strategy by announcing a 14% dividend hike to mark its 10th consecutive double-digit payout boost.

Executives made it clear that they have the firepower to continue that trend through a wide range of selling conditions. "Our growth ... model, combined with our strong balance sheet, position Starbucks to have the financial flexibility to both invest in our growth and reward our shareholders," Johnson said.

Demitrios Kalogeropoulos owns shares of McDonald's and Starbucks. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool recommends Dunkin' Brands Group. The Motley Fool has a disclosure policy.

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