Shares of Starbucks (SBUX -0.76%) fell as much as 6% on Monday after the company announced it was suspending its share buyback program. Former Starbucks CEO Howard Schultz stepped in as interim CEO on Monday and wasted no time implementing changes aimed at investing more in the company's employees and its stores.
Despite the market's flinching response to sell Starbucks stock, there are reasons to believe the company could be better off spending money on other ideas instead of buying back its own stock. Here's why the decision could ultimately be a good thing for Starbucks.
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Improving its public image
In October, Starbucks announced a $20 billion dividend and share repurchase program between fiscal 2022 and 2024. Given that Starbucks paid about $2.1 billion in dividends in 2021, and typically increases its dividend by around 5% to 15% a year, the company probably wouldn't be spending more than $7 billion on dividends over that three-year time frame. That leaves around $13 billion toward stock buybacks in just three years.
If executed correctly, stock buybacks can be a great way for a company to repurchase its own shares at a good price, pay fewer dividends since there are fewer outstanding shares, and increase earnings per share, which drives shareholder value. Yet stock buybacks also leave less money for a company to use on acquisitions, dividends, or capital expenditures to grow the business.
In Starbucks' case, the announcement of a massive stock buyback program was damaging its public image. Like other food and beverage companies, Starbucks has been battling unionization as workers aim for better benefits and higher pay. It's a little hypocritical for a company to argue it can't afford to pay workers more if that same company is dishing out $20 billion in three years to its shareholders. The divide between stock buybacks and employee compensation isn't specific to Starbucks, but has been a topic of debate ever since the U.S. Securities and Exchange Commission (SEC) made stock buybacks legal in 1982.
Raising the stakes
Starbucks' decision to suspend buybacks could be a net positive for the company if it wisely deploys the money it would have spent on buybacks. Starbucks has set May 3, 2022, as the tentative date for its second-quarter fiscal year 2022 earnings announcement. Executive commentary will be arguably more important than the results as investors will get to listen to how Schultz and his team plan to grow the business.
Starbucks will likely give investors some insight into its plans for the dividend, too. The company has paid and raised its dividend every year since 2011. The dividend is now a core part of the investment thesis for Starbucks stock.
In a perfect world, Starbucks could function like many of the best dividend stocks, which provide their shareholders with passive income while also growing the business, which makes the company more valuable over time. In this vein, shareholders get short-term and long-term benefits for holding a company's stock.
But if Starbucks doesn't use its capital wisely, that could upset investors who could argue it would have been better for the company to stick to its original plan to buy back a ton of stock.
Crunch time
Starbucks isn't necessarily at a tipping point, but it is at a critical junction. In recent years, the stock has underperformed the S&P 500 -- and for good reason. Starbucks was heavily impacted by the U.S.-China trade war given that China is by far its second-largest market. Starbucks also took a multi-year hit from the COVID-19 pandemic and has had to find ways to drum up business even as folks commute a lot less than they did in the past. And today, Starbucks is dealing with inflation, unionization, and the lingering effects of the pandemic.
For these reasons, some investors may prefer to wait to make sure the business can find a footing and get back to a more consistent growth trajectory. But for those who believe in the long-term future of the business, picking up a couple of shares of Starbucks stock -- down 30% off its high -- might be a move worth considering.
