This Beaten-Down Nasdaq Stock Just Raised Its Dividend to a Record High

Starbucks (SBUX 0.47%) stock has been on a roller-coaster ride over the last several years, which may come as a surprise given how established the company is. But the COVID-19 pandemic heavily disrupted Starbucks' performance in its two largest markets -- the U.S. and China. And now, investors are trying to find a reasonable price for Starbucks stock and determine where the company's long-term growth will come from.

Over the last five years, shares have reached a low of $50.02 (during the peak of the pandemic-induced sell-off on March 18, 2020) and hit a high of $126.06 on July 26, 2021. Now shares are in the low- to mid-$90 range, in limbo and seeking direction.

The stock price may have been all over the place, but one aspect of consistency has been the dividend. Starbucks continues to make sizable dividend raises every year. Here's why Starbucks is an overlooked dividend stock, and why the dividend deserves to play a role in the long-term investment thesis for the company.

Image source: Getty Images.

Big-time raises

Starbucks began paying a dividend in 2010. And since then, it has raised the dividend every single year.

Data source: Starbucks. 

As you can see in the table above, these aren't minimal raises. On Sept. 20, Starbucks raised its quarterly cash dividend to $0.57 per share, a sizable 7.5% increase. At $2.28 per share in dividends over a year and at a current price of $91.17 at the time of this writing, Starbucks stock has a 2.5% forward yield. Starbucks is now paying a higher quarterly dividend than an entire year's worth of dividends less than 10 years ago. Meanwhile, the stock price has increased by 136% over the last decade, which goes to show how the dividend growth has compounded at a faster pace than the stock price.

Throughout the pandemic -- even as its earnings were suffering -- Starbucks still raised the dividend every year. Compared to the pre-pandemic 2019 payout of $1.49, Starbucks is on track to pay $2.20 in dividends this year, a nearly 50% increase.

The lesson here is that a stock price can be volatile, but a company's commitment to shareholders can be consistent. Starbucks can't control what its stock price does. However, it can control how it returns value to shareholders. Thirteen consecutive years of dividend increases provide a vote of confidence that investors can count on Starbucks to keep raising the dividend for years to come.

Hitting the mark

As for the core business, Starbucks has returned to growth faster than some investors may be giving it credit for. The most telling chart (below) displays revenue, diluted earnings per share (EPS), and cash flow from operations (CFO) per share over the past 10 years.

SBUX Revenue (TTM) data by YCharts

The chart is impressive. Starbucks' revenue is at an all-time high. Diluted EPS has more than recovered from the pandemic hit and is also near an all-time high. CFO per share is more than double dividends per share. So all told, the company is near the top of its game. At least for now.

Bears may question whether Starbucks can keep it up, especially if consumer spending slows and the economy takes a turn for the worse. The good news is that Starbucks has an ace in the hole -- its rewards program.

Last quarter, Starbucks generated 57% of its U.S. revenue from members of its rewards program. Its 90-day active Starbucks Rewards customers were nearly 75 million globally, including over 20 million in China and 31.4 million in the U.S. and representing a staggering 25% growth rate in the quarter. The goal of every business is to boost engagement from a core customer base. Having loyal customers can smooth out the volatility that can come from an economic cycle. 

Starbucks Rewards goes hand in hand with Starbucks mobile ordering. In a nutshell, the objective is to improve the experience by making it easier for customers to place orders on demand, to reduce or eliminate wait times, and to provide incentives like free drinks and food items. Customers get a favorable experience from Starbucks relative to other options and Starbucks is able to boost sales from existing customers instead of having to overly rely on infrequent or new customer acquisitions. 

A well-rounded stock to buy now

The biggest mistake investors can make with Starbucks is assuming the pandemic knocked the company off course. Starbucks accelerated its rewards program members and mobile ordering volumes during that time and has built upon that growth as the economy has opened and people have moved away from COVID restrictions. The bottom-line results may have slowed during the most restrictive days of the pandemic, but engagement through the Starbucks app simply got better and better.

The business is stronger today than it has ever been. And the dividend growth provides the cherry on top of that underlying investment thesis that Starbucks will be able to sustain growth from its core customer base in addition to the usual methods of opening more stores, price increases, etc.

Starbucks isn't a cheap stock. So waiting for even more of a pullback is certainly reasonable. But it's also not expensive given the strength of the brand and the incredible growth of the rewards program. All told, now is a good time to take a position in Starbucks.