Many of us rely on a delicious cup of hot coffee to start our workday. Starbucks (SBUX 0.29%) does a great job of serving up that daily dose of caffeine, along with a growing selection of food items for breakfast and lunch. What many investors may not realize is that the company also pays out consistent quarterly dividends.
When searching for a great dividend stock, there are a few important aspects to consider. The first, of course, is the growth of the underlying business. Dividends tend to grow in tandem with the company's core operations, and investors can ideally enjoy the best of both worlds -- a rising share price and a larger chunk of passive income flowing into their bank accounts. Another aspect is the dividend yield, which measures the return you get from dividends based on the purchase price of the shares.
Does Starbucks possess the attributes of a great dividend stock? Let's find out.
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A history of consistent free cash flow
The following chart shows the annual free cash flow generation for Starbucks since 2012. As a quick recap, free cash flow represents the operating cash flow generated by the core operations of a business, less its necessary capital expenditures.
Source: Starbucks 10-K Filings. Fiscal 2020 data includes only the first nine months of results. Chart by author.
From 2012 to 2019, the company generated negative free cash flow in only one year: 2014. This consistency of free cash flow generation is a boon for dividend investors, as it demonstrates the ability of the company to fund its dividend payments even as it reinvests some of its earnings for future growth.
For the first nine months of fiscal 2020, free cash flow has gone slightly negative as Starbucks closed stores around the world in response to the pandemic. Other than this anomalous year and 2014, Starbucks has shown a strong track record of free cash flow generation.
Growing dividends over the years
Next, we'll look at Starbucks' dividend payment history. The company started paying out a dividend in 2010, and as you can see in the chart below, the company has been steadily growing its payout. Since 2012, the dividend has more than quadrupled with compound annual growth of 22.5%. And the payout growth is all the more impressive when you consider the fact that Starbucks expanded its global footprint by 73% in the same period with over 13,000 new locations.
Source: Starbucks 10-K Filings. Fiscal 2020 data includes only the first nine months of results. Chart by author.
In the first nine months of fiscal 2020, Starbucks has maintained its $0.41 quarterly dividend, despite the severity of the economic crisis and a third-quarter net loss of $678 million. With a trailing 12-month payout of $1.64 per share, the stock yields 1.9% as of this writing.
An evolving organization
A final hallmark of a great dividend stock is its ability to continue paying dividends even during crises. In this respect, Starbucks has performed admirably. CEO Kevin Johnson noted during the latest earnings call that there was a "significant acceleration in the number of customers who downloaded the Starbucks app and joined Starbucks Rewards, totaling three million in the quarter and up 17% from Q2."
As commuting patterns changed during the pandemic and customer demand for drive-through and takeout options increased, Starbucks saw 90% of its sales volume in the fiscal third quarter flow through both drive-through and mobile order-and-pay. To further align with new contactless customer behaviors, the company is coming up with innovative store formats such as Starbucks Pickup and curbside delivery.
This evolution in the face of one of the biggest health crises in the last century sets Starbucks apart from its competition. New Starbucks Pickup stores will be built in urban areas and within a three-to-five minute walk from a traditional Starbucks store, providing customers with options for both dine-in and takeout. Management plans to develop 50 of these locations over the next 12 to 18 months with a goal of eventually opening several hundred in the U.S. in three to five years. The curbside pickup experience will be available in 700 to 1,000 locations by the end of the current quarter, which will help drive incremental customer spending.
In addition, the company has opened almost 100 net new stores in China during the previous quarter, bringing the total to over 4,400 locations as the country shifts back to more normal operating conditions. With virus cases in the region plunging, 99% of stores in that market have reopened with 90% operating regular hours and 70% with full seating. Starbucks' Global Coffee Alliance with Nestle has also expanded the company's presence in at-home coffee to 53 markets with a target to reach 60 markets by the end of the fiscal year.
Keep those dividends flowing
It's almost certain that Starbucks has the financial muscle to push through these changes and continue rewarding shareholders with quarterly dividends. As conditions begin to normalize in the U.S. and worldwide, the company can then resume its global store expansion plans. The resulting growth and healthy cash flows should leave shareholders confident that the dividends will continue to flow as well.
