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 -0.35%) 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.
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.
SBUX Dividend data by YCharts.
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.
