School is out, and summertime is here. When you're taking a long overdue trip with your family, the last thing you probably want to be thinking about is your stock portfolio. But with the constant clamor that comes when asset prices are falling, it can be challenging to find peace of mind.
Sometimes, the worst part about a prolonged bear market isn't necessarily the paper losses but rather the psychological toll of watching a portfolio go down month after month. One of the best ways to buffer yourself from the short-term fluctuations of the stock market is by investing in name-brand companies that you can count on to be around for decades to come.
Starbucks (SBUX 1.09%) is a dividend stock that has been through past economic downturns. Here's what makes it a great buy now and why owning Starbucks stock can give your portfolio the stability needed to outlast a market crash.
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Accelerating a shift away from the coffee house
Starbucks has had a rough few years. The COVID-19 pandemic altered the way customers experienced its stores. In the old days, Starbucks was mainly known for its coffee house vibes where people could find a decent internet connection and a beverage. In the years leading up to the pandemic, Starbucks was also investing in drive-thrus and mobile order and pickup. During the worst of the pandemic, those options became Starbucks' saving grace.
Today -- even after Starbucks has reopened the seating area at most stores -- drive-thrus, mobile order and pickup, and deliveries make up a staggering 75% of sales. And that figure doesn't include customers that pay at the register, grab their order, and then leave the store. The point is that a relatively small percentage of customers are ordering and hanging out at Starbucks. And that means the profile of the Starbucks customer has changed.
Starbucks 2.0
So what's next? Well, Starbucks plans to lean into the grab-and-go concept through greater emphasis on drive-thrus as well as Starbucks Pickup stores. Starbucks Pickup stores have smaller footprints, are concentrated in urban settings, and focus solely on to-go orders. The company is also receiving an increasing number of delivery orders from Uber Eats and other platforms. We've seen similar trends from Chipotle (which offers delivery directly through its app).
Starbucks is making an effort to better monetize its delivery business and could begin offering delivery directly through its app in the coming years. In the fiscal 2022 second-quarter earnings call, management said the $500 million delivery business was up 30% year over year in the first half of fiscal 2022. And that's despite the fact the economy was much less open in the first half of fiscal 2021 than in the following year. For context, Starbucks says mobile order and pay is a $4 billion business. So it's clear to see Starbucks' delivery business is still in the early stages and has a lot of room to contribute to the top and bottom line.
There are over 27 million active Starbucks Rewards members, making it one of the most successful food and beverage rewards programs in the U.S. Rewards members make up over half of all Starbucks transactions, which is good news, because the rewards program encourages repeat business and keeps customers engaged.
Laying the groundwork
Starbucks has what it takes to embrace more grab-and-go ordering. The prevalence of the Starbucks app and the growing number of active rewards members gives it a big advantage over other food and beverage companies when it comes to payments, customizing orders, keeping customers engaged, and potentially offering bonus rewards for delivery orders. The Starbucks app is famous for implementing "dashes" that encourage folks to buy more of their most ordered items or try new things. It would make sense to see Starbucks eventually offer some sort of rewards bonuses for delivery orders, which could accelerate its growth in that market.
So although some folks may feel Starbucks is losing its coffee house charm, it's probably a good thing from a business perspective as the next chapter for the company could unlock a lot more value for decades to come.
An underrated dividend stock
Starbucks has raised its annual dividend every year since first issuing a quarterly dividend in 2010.
Data by YCharts.
What's more, Starbucks tends to earn free cash flow (FCF) and net income that far exceeds its dividends. Here's a look at its FCF per share and earnings per share relative to its dividend per share over the last 12 years.
Data by YCharts.
With a 2.5% dividend yield and plenty of upside, Starbucks stands out as a reliable stock to own no matter the market cycle.
A balanced investment
Starbucks is the kind of business that offers a nice blend of growth and income. But it also isn't an expensive stock with a price-to-earnings ratio of just 20.5. What's more, investors can take solace knowing that no matter how bad the market sell-off gets, Starbucks has the staying power needed to be around for the long haul. Investing in companies of this stature takes the pressure off of your portfolio so you can enjoy life, sit back, relax, and let compounding returns work their magic.
