Elevated inflation and interest rate hikes have led the Nasdaq Composite to plunge 30% so far this year. And there are many stocks that have plummeted by even more year to date.
The coffee and cold beverage chain Starbucks (SBUX 0.97%) is down 32% so far this year. This raises the following question: Is the stock a buy for income investors? Let's dig into Starbucks' fundamentals and valuation to find out.
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The company tends to beat expectations
In May, Starbucks shared its results for the second quarter ended April 3.
The company recorded $7.64 billion in net revenue during the quarter, up 14.5% from a year ago. This was just above the average analyst net revenue prediction of $7.6 billion for the quarter. How did Starbucks exceed the analyst consensus for the sixth quarter out of the last 10 quarters?
Revenue growth in the quarter was driven by a 7% increase in its global comparable store sales. Thanks to price hikes, Starbucks' average ticket increased by 4% year over year. Yet, the higher prices didn't deter the company's customers from frequenting the store during the quarter. That's how Starbucks' comparable transactions rose 3% in the second quarter.
The company also saw meaningful growth in its Starbucks Rewards loyalty program, which grew 17% over the year-ago period to 26.7 million active members. This is especially encouraging because the company's loyalty program is leading customers to spend more heavily and frequently. At the same time, Starbucks managed to grow its store count 5.1% year-over-year to 34,630 around the world.
On the bottom line, the company reported $0.59 in non-GAAP (adjusted) diluted earnings per share (EPS) for the quarter -- down 3.3% from a year ago. This narrowly missed the average analyst earnings forecast of $0.60. Even so, Starbucks has met or surpassed the analyst net revenue consensus for seven out of the past 10 quarters.
Cost inflation led to increased operating expenses during the quarter. This is why Starbucks' non-GAAP operating margin fell 300 basis points to 13% for the second quarter. Unfavorable operating expenses were partially offset by a 2.6% reduction in the company's weighted-average diluted share count to 1.2 billion in the quarter.
High dividend growth should continue
Starbucks offers investors a 2.5% yield, which is significantly above the S&P 500 index's 1.6% yield. And if that wasn't enough, the company should have plenty of dividend growth left in its future.
Starbucks' dividend payout ratio is a manageable 68.%, which should allow for dividend growth that's in line with earnings growth in the years to come. And with analysts projecting 7.9% annual earnings growth through the next five years, this should translate into high-single-digit annual dividend growth. This makes Starbucks an excellent dividend stock for investors seeking both high current income and future income.
Growth at a reasonable price
Starbucks appears to be a fundamentally healthy business. And the stock's valuation looks like it provides a sensible entry point for long-term investors.
Starbucks' forward price-to-earnings (P/E) ratio of 27.6 is above the S&P 500 restaurant industry average forward P/E ratio of 23.3. But given the stock's growth profile and quality, this valuation is arguably justified. And Starbucks' price-to-free-cash-flow ratio of 26 is moderately below its 10-year median of 30.4. Given that Starbucks' fundamentals are as strong as they have been in the past, this is again a justifiable valuation.
