One thing that financial markets despise is uncertainty. And it doesn't matter what kind of uncertainty it is -- whether economic or geopolitical. This is precisely why the Nasdaq Composite index has dipped 12% over the last year.
But plenty of stocks have fared much better during that time. Shares of coffee and beverage giant Starbucks (SBUX 0.07%) have gained 10% in the last 12 months. And despite this run-up in the stock price, it looks like a buy for investors seeking rising dividend income.
Let's dig into the company's fundamentals and valuation to lay out the case for Starbucks stock.
NASDAQ: SBUX
Key Data Points
The rewards program is fueling growth
With more than 36,000 stores around the world, Starbucks is the most well-known coffee and cold beverage franchise on the planet. This worldwide presence is how the Starbucks brand itself was worth an estimated $46 billion in 2022, according to consultancy Brand Finance, which makes it the most valuable brand in the food and beverage sector.
Thanks to a combination of quality ingredients, service, and marketing, the Seattle, Washington-based company continued to brew up potent results in its 2023 fiscal first quarter ended Jan. 1. Starbucks' net revenue climbed 8.2% higher year over year to $8.7 billion in the quarter. The company also logged 5% global comparable-store sales growth.
Due to price increases to compensate for rising product and store costs, Starbucks' average ticket rose 7% in the quarter. The coffee and cold beverage company experienced a 2% decline in global comparable transactions. At first glance, this may make it seem like consumers didn't tolerate increased prices. But with limited mobility in China stemming from COVID-19 lockdowns, Starbucks' results were exceptional.
The factor that really put the company over the top in Q1 was once again its booming rewards program. Starbucks' active U.S. rewards membership surged 15% over the year-ago period to 30.4 million. This has been critical to the company's growth because active members spend more money, more frequently with the company.
Starbucks' non-GAAP (adjusted) diluted earnings per share (EPS) edged up by 4.2% year over year to $0.75 during Q1. Because operating expenses grew at a faster clip (8.8%) than net revenue, the company's non-GAAP operating margin dipped 60 basis points over the year-ago period to 14.5% for the quarter. As a result of share repurchases, Starbucks' weighted-average diluted share count fell 2% in the quarter. These elements explain how the company's net revenue expanded at a faster rate than adjusted-diluted EPS during the quarter.
A combination of diminishing inflation and more store openings should drive adjusted-diluted EPS upward moving forward. That's why analysts believe that Starbucks' adjusted-diluted EPS will compound at an 18% annualized rate for the next five years. Putting this into perspective, that is superior to the restaurant industry's average earnings growth outlook of 13.1%.
Image source: Getty Images.
Serving up delicious dividend growth
Starbucks' 2% dividend yield is higher than the S&P 500 index's 1.7% yield, which income investors will enjoy. Better yet, investors get the added benefit of tremendous dividend growth. The company's quarterly dividend per share has quintupled in the past 10 years from $0.105 to $0.53.
And Starbucks' impressive dividend growth should continue in the years ahead. That's because the company's dividend payout ratio will come in around 62% for the current fiscal year set to end in September. This leaves the company with enough funds to open more stores and repay debt.
A world-class company at a fair valuation
Starbucks is a fundamentally promising business. But surprisingly, the stock appears to still offer decent value at the current $103 share price.
Starbucks' forward price-to-earnings (P/E) ratio of 25.7 is moderately higher than the restaurant industry's average of 23.4. Considering the company's above-average growth prospects, this valuation makes Starbucks a buy for investors seeking solid dividend growth and total returns in the years to come.