Starbucks (SBUX 0.65%) stock is down over 30% from its all-time high set in July 2021 as investors weigh broader market volatility, inflation concerns, and a management shakeup at the company.
What's more, it is facing threats of unionization. Reports say that at least 100 Starbucks stores have petitioned to unionize, with some workers seeking $25 hourly wages. Despite what the headlines would indicate, the company has been relatively proactive with raising wages. In October 2021, Starbucks announced it would raise its U.S. starting wage to $15 an hour by summer 2022, bringing the average retail hourly rate to nearly $17 per hour.
Meanwhile, CEO Kevin Johnson announced his retirement on March 16, transitioning out of the CEO role on April 4, 2022. In the meantime, Howard Schultz will step in as interim CEO. Starbucks expects to have a permanent CEO by the fall.
Add it all up, and there's a whole heap of uncertainty in the broader markets and for Starbucks specifically, which is pressuring the stock. Here's why that uncertainty could make for a great buying opportunity.
Image source: Getty Images.
A strong underlying business
Johnson did a great job expanding Starbucks' stores, growing same-store sales, navigating the pandemic, and really hammering home the Starbucks Rewards program and Mobile Order and Pay. The Starbucks app routinely ranks as a top-five food and beverage app on both the Alphabet Android and Apple stores.
As of the company's most recent period (first quarter of fiscal 2022), Starbucks grew 90-day active Rewards members by 21% to 26.4 million. That's nearly double the number it had four years ago and triple what it had in 2015. Starbucks Rewards members now make up the majority of Starbucks sales, contributing 53% of Q1 fiscal 2022 revenue.
Starbucks blends mobile ordering, rewards program, and drive-throughs together into one powerful grab-and-go experience. Mobile Order and Pay was launched in 2015. By Q1 fiscal 2017, Starbucks said that 10% of domestic orders were done through Mobile Order and Pay. Five years later, in Q1 fiscal 2022, Mobile Order and Pay and Drive-through orders accounted for 70% of domestic orders.
A strategy built on convenience
Starbucks' opportunity doesn't lie solely in growing the number of its traditional stores, but rather in growing the number of customers who use drive-throughs and mobile order and pay. At the end of the day, Starbucks' bottom line produces the same result whether a customer buys one drink and leaves or buys the same drink and stays for three hours.
A strong Rewards Member base means that Starbucks can open smaller stores with less seating that also have drive-throughs and counters geared exclusively toward grab-and-go ordering and not the traditional coffee house style. Starbucks has been discussing this transition for years, and it's my opinion that it makes a lot of sense as a great way to grow the business. Starbucks can still have coffee-house-style stores in locations where it is attractive to do so. But the data shows that most customers are just going to Starbucks to pick up their orders.
A company that is dedicated to its dividend
Starbucks deserves a lot of credit for doing just about everything dividend investors could possibly want. The company began paying a dividend in 2010. Since then, it has raised it every single year, even during the U.S.-China trade war challenges and the COVID-19 pandemic.
|
2021 |
2020 |
2019 |
2018 |
2017 |
2016 |
2015 |
2014 |
2013 |
2012 |
2011 |
2010 |
|
|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Dividends paid per share |
$1.84 |
$1.68 |
$1.49 |
$1.32 |
$1.05 |
$0.85 |
$0.68 |
$0.55 |
$0.445 |
$0.36 |
$0.28 |
$0.18 |
Data source: Yahoo! Finance.
What's also nice about Starbucks' dividend raises is that they are predictable. Between 2011 and 2021, Starbucks issued the dividend raise for its November dividend every single year, except for 2018 when it raised the dividend for the August payout. Investors certainly didn't mind the three-months-ahead-of-schedule raise. In other words, Starbucks not only increases its annual payout every year, but consistently increases the quarterly payout by around four cents to six cents every year in time for the November issuance.
Note that Starbucks tends to issue a press release in late September announcing a dividend raise in time for the November payout. Investors who view consistent dividend raises as a crucial reason for owning Starbucks stock could do well to mark their calendars for late September and early October -- to make sure Starbucks stays on schedule for what would be its 12th consecutive annual dividend increase.
Starbucks does a good job raising the dividend at a healthy rate relative to earnings and free cash flow. It generally stays within a reasonable 50% to 60% or so payout ratio.
SBUX Net Income (Annual) data by YCharts
In its fourth-quarter fiscal 2021 earnings call, Starbucks said that it is targeting double-digit earnings growth and a payout ratio of around 50%.
Tying it all together
Starbucks stock has a 2.3% dividend yield, a price-to-earnings (P/E) ratio of 23.6 (vs. a five-year median of 29.8), and a business that expects to resume growing at a low double-digit pace once it gets through its short-term challenges. There's no denying Starbucks is in for a challenging fiscal 2022. But when the dust settles, it's easy to see a world where Starbucks is growing nicely, increasing its dividend, and worth a lot more than it is today.
