Finding companies with well-known brands that sell high-demand products is the closest thing in investing to a guarantee of success. This is because successful products have the pricing power and durability to withstand just about any business environment.
When many people think of great coffee or cold beverages, the first thing that comes to mind is Starbucks (SBUX -1.02%). Let's look at why the company could be a great pick for investors craving steadily rising dividend income.
Significant business growth persists
Coffee is among the most popular drinks on the planet after water. Two billion cups of coffee are consumed each day by around 1 billion coffee drinkers around the world. With nearly 37,000 stores throughout the globe and a $120 billion market capitalization, Starbucks is the biggest coffee chain by far.
| Metric | Q2 2022 | Q2 2023 |
|---|---|---|
| Comparable-store sales growth rate | 7% | 11% |
| Store count | 34,630 | 36,634 |
| Non-GAAP operating margin | 13% | 14.2% |
Data source: Starbucks Q2 2023 earnings press release and Starbucks Q2 2022 earnings press release
Starbucks' net revenue surged 14.2% higher year over year to $8.7 billion in its fiscal second quarter ended April 2. The company's double-digit comparable store sales growth was largely driven by Starbucks Rewards U.S. loyalty program membership rising 15% over the year-ago period to 30.8 million for the quarter. That's because loyalty program members are likely to spend more money at Starbucks' stores, more often than non-loyalty program members.
Because these loyalty customers visited Starbucks more often, this also helped transactions grow at a year-over-year rate of 6% during fiscal Q2. Increased loyalty program membership coupled with price hikes led to a 4% increase in average ticket (the average transaction amount per customer) in the quarter.
The Washington-based company's non-GAAP (adjusted) diluted earnings per share (EPS) soared 25.4% over the year-ago period to $0.74 for fiscal Q2. Slower growth in Starbucks' total operating expenses (11.9%) than in net revenue led to meaningful non-GAAP operating margin expansion during the quarter. This explains how the company's adjusted diluted EPS grew at a much faster clip than net revenue in the quarter.
Because of the world's insatiable thirst for coffee, Starbucks can probably continue to open many more stores in the years ahead. This is why analysts think the company can deliver 18.1% annual earnings growth over the next five years. For context, that is superior to the restaurant industry average annual earnings growth outlook of 15.2%.
Image source: Getty Images.
Brewing up big-time payout boosts
Starbucks' 2% dividend yield is a tad more than the S&P 500 index's 1.7% yield, which is one thing that income investors will like about the stock. But with the quarterly dividend per share soaring more than five-fold over the last 10 years, that isn't the only thing to like about it.
There is also reason to believe that the payout can keep growing by at least a high-single-digit pace annually. Starbucks' dividend payout ratio is expected to clock in at just under 62% for the fiscal year ending in September. That should give the company the capital it needs to expand and strengthen its balance sheet.
Starbucks is an elite business at a reasonable valuation
Shares of Starbucks gained 8% so far in 2023. But the stock still appears to be a decent buy for dividend growth investors.
Starbucks' forward price-to-earnings (P/E) ratio of 25.9 is a tad above the restaurant industry average forward P/E ratio of 24.7. However, this premium valuation is compensated for by the company's greater growth prospects and industry dominance.
