The best dividend stocks are those that find a way to generate steady and growing bottom-line profits. One way to do that is to embed themselves into the daily routines of consumers. This is can be accomplished through a combination of immense brand power and consistently satisfying products or services. Few businesses have managed to balance their brand with their product quality like the coffee and cold beverage chain operator Starbucks (SBUX 0.18%).
Starbucks' ongoing success in this regard has allowed the company to pay out a consistent dividend and to boost its dividend payout for 12 consecutive years. But does Starbucks' dividend (which currently yields 2.3%) make it a buy for income investors?
Let's dive into the company's fundamentals and valuation to see if we can find an answer.
Inflation weighed on profitability
Despite high inflation in many markets, Starbucks' nearly 35,000 stores around the world managed to remain an important part of customers' daily routines. At least that appeared to be the case based on its latest financial results (fiscal 2022's third quarter, which ended July 3).
The report said Starbucks generated $8.2 billion in net revenue during Q3, an 8.7% increase year over year. Starbucks logged 3% global comparable-store sales growth for Q3. Price increases and a 13% growth rate in active U.S. Starbucks Rewards members to 27.4 million were what drove the average comparable ticket 6% higher year over year. Rewards members tend to be heavier spenders based on dollar volume and more frequent customers.
Product quality and its best-in-class brand were likely part of the reason customers seemed willing to accept the price increases. It also likely contributed to global comparable transactions falling just 3% during the quarter, despite high inflation and continued COVID-19-related temporary lockdowns in high-growth markets like China. A 5% increase in the company's store count in Q3 was also a likely contributor.
Starbucks recorded $0.84 in non-GAAP (adjusted) diluted earnings per share (EPS) for Q3, which were down 15.2% over the year-ago period. Cost inflation led operating expenses significantly higher, which resulted in a 350 basis-point decline in non-GAAP operating margin to 16.9% in Q3. This was only partially offset by a 3% year-over-year decline in Starbucks' outstanding share count to 1.2 billion.
As inflation gradually tapers off, Starbucks should return to its typical profitability. Along with its continually growing rewards program, this is why analysts are expecting 7.6% annual adjusted diluted EPS growth through the next five years.
The market-beating payout is safe and set to grow
Starbucks' 2.3% dividend yield outpaces the S&P 500 index's 1.6% yield. It also happens to be above Starbucks' average yield over the past decade of 1.6% and is likely a reflection of the stock's current discounted price. The company has weathered the pandemic well and continued to payout a dividend despite strong headwinds, suggesting its dividend is secure.
The company's payout ratio also suggests there is room for future growth. It's projected that Starbucks' dividend payout ratio is a very manageable 54.6%. This allows the company to retain enough capital to reinvest in its business and repay debts. the level also suggests dividend growth will closely follow earnings growth for the foreseeable future.
Starbucks is a quality business at a fair price
Starbucks is a world-class company. And the valuation doesn't appear to be unreasonable for its quality.
Starbucks' forward price-to-earnings (P/E) ratio of 25.3 is only slightly above the restaurant industry's average forward P/E ratio of 23.7. And its trailing-12-month price-to-sales (P/S) ratio of 3.14 is well below the 10-year median of 3.8. Given that the company's fundamentals are arguably as strong now as they have been in the past, Starbucks looks like it could still be a buy for income investors.