There are numerous advantages to dividend-growth investing. But one of the most significant is arguably the fact that the best dividend payers can hand out payout hikes in even the most uncertain environments.
Having upped its dividend for 13 consecutive years, Starbucks (SBUX 0.47%) looks to fit this profile. This raises the question: Should dividend investors buy the stock for their portfolios? Let's examine Starbucks' fundamentals and valuation to figure it out.
Loyalty-program momentum is sustaining growth
With more than 37,000 stores around the world operating under its name, Starbucks is the leading coffee and cold beverage franchise. The company's $116 billion market capitalization dwarfs the $5 billion market value of one of the next biggest coffee franchises, Dutch Bros.
| Metric | Q3 2022 | Q3 2023 |
|---|---|---|
| Total store count | 34,948 | 37,222 |
| Operating margin | 16.9% | 17.4% |
Data source: Starbucks.
Starbucks' total net revenue rose by 12.5% over the year-ago period to a record $9.2 billion during the fiscal third quarter ended July 2. This remarkable top-line growth was mostly fueled by a 15% year-over-year growth rate in the company's U.S. rewards program to 31.4 million to end the quarter. Customers earning rewards generally spend more and more frequently at Starbucks' stores than they would otherwise if they weren't enrolled in the program. This led comparable transactions to grow by 5% in the quarter, while the average ticket gained 4%. Combined with its greater store count, that explains how the company posted double-digit net-revenue growth for the quarter.
Starbucks' non-GAAP (adjusted) diluted earnings per share (EPS) climbed by 19% over the year-ago period to $1 during the fiscal third quarter. Due to disciplined cost management, the company's total operating expenses grew at a slower rate than net revenue in the quarter. This helped Starbucks' non-GAAP operating margin expand by 50 basis points for the quarter, which is how its adjusted diluted EPS growth outpaced net-revenue growth.
As the company builds on its store presence and loyalty program, analysts believe adjusted diluted EPS will compound by 16.3% annually for the next five years. For perspective, that is more than the restaurant industry peer average of 14.9%.
Image source: Getty Images.
A competitive dividend with solid growth prospects
If Starbucks' potent growth potential wasn't enough for investors, the company has another trick up its sleeve to catch the interest of investors: Starbucks' 2.1% dividend yield is significantly better than the S&P 500 index's 1.5% yield. And if that still doesn't convince dividend investors, the company could deliver respectable dividend growth in the future.
This is because Starbucks' dividend-payout ratio is positioned to register at approximately 61% for the fiscal year 2023 ending next month. That leaves the company with the necessary funds to execute store openings, repay debt, and deliver at least high-single-digit annual-dividend growth for the foreseeable future. A 2%-plus starting yield paired with such growth offers an attractive mix of income and growth.
The stock is a subtle value
Alongside the broader market, shares of Starbucks have rallied 14% in the past 12 months. But thanks to its considerable growth in profits, the stock doesn't look like it is richly valued. Starbucks is priced at a forward price-to-earnings (P/E) ratio of 24.6, which is just above the industry average forward P/E ratio of 23.9. Considering its hot growth profile, this is what makes the stock a buy for dividend-growth investors at the current $100 share price.
