The Nasdaq Composite (^IXIC 0.91%) is down 14.1% from its 52-week high, putting it in correction territory.
In just the last month, the index has tumbled 6.6%, but coffee giant Starbucks (SBUX 0.54%) is down an even worse 14.6%.
Here's why the sell-off in the dividend stock is a buying opportunity.
Image source: Getty Images.
The turnaround is going well
In March 2023, Laxman Narasimhan assumed the role of Starbucks CEO, replacing Starbucks founder and longtime CEO Howard Schultz, who had stepped in to fill the role temporarily.
Starbucks was struggling, with growth stalled in China and inflation taking a sledgehammer to its profitability. Starbucks set out a bold plan to turn the business around, but it didn't work. In August 2024, it announced that Chipotle Mexican Grill CEO Brian Niccol would become the new head of Starbucks. The company was in such dire straits that the stock popped a staggering 24.5% on the news -- indicating investor excitement with the management change and a belief that Niccol possessed the leadership prowess to turn the business around.
Niccol quickly set out a new plan to get Starbucks back to its roots by revamping Mobile Order and Pay to reduce customer wait times and Starbucks employee headaches, eliminating excessive upcharges for non-dairy milk, pausing price increases, and more.
The stock soared in February in the weeks following its first-quarter fiscal 2025 earnings. The stock reached its highest level since December 2021, even though Starbucks delivered lower comparable sales.
NASDAQ: SBUX
Key Data Points
New strategies come at a cost
On the latest earnings call, Starbucks discussed plans to take its strategic initiatives a step further by reducing food and beverage selections by 30%, in an effort to drive volume and lower its dependence on price increases.
However, Starbucks' margins could be strained in the near term. The lack of price increases could drive demand, but also leave Starbucks more vulnerable to higher input costs from rising coffee bean prices and inflationary pressures.
In its latest quarter, Starbucks saw a 180-basis-point hit to its North American margins due to higher hours, wages, and employee benefits. Removing the non-daily upcharge resulted in a 60-basis-point effect on margins. An uptick in marketing spending on ads through linear TV media to "reintroduce Starbucks to the world" also led to higher costs.
As you can see in the following chart, revenue has flatlined, while operating margins are at their lowest level in 10 years (if you don't factor in the pandemic-induced plunge).
SBUX Revenue (TTM) data by YCharts.
Earnings per share (EPS) in fiscal 2024 weren't much higher compared to pre-pandemic times, showcasing how Starbucks has struggled to expand in recent years.
Analyst census estimates have EPS declining to $2.94 in fiscal 2025 and then increasing to $3.64 in fiscal 2026, which would be an all-time high. But it remains to be seen if Starbucks can live up to expectations and then chart a path toward consistent growth -- both domestically and in key markets like China.
Starbucks has a solid dividend
Starbucks has increased its dividend for 14 consecutive years. It currently yields 2.5%, which is much higher than the S&P 500 average of 1.3%. At $2.44 per share per year, Starbucks' dividend is fairly high relative to earnings. So for Starbucks to sustain a solid dividend growth rate, it would be best to increase earnings faster than the dividend payment to bring down its payout ratio.
Starbucks has increased its dividend at a compound annual growth rate of 20%, but the latest raise was just 7%. I would expect mid-single-digit raises from Starbucks until its turnaround translates to meaningful growth and higher margins.
Starbucks is a balanced buy
Starbucks is investing money to make money by improving the employee and customer experience. It could be the right long-term move, but in the near term, Starbucks could have a rocky fiscal year 2025. In other words, Starbucks' turnaround is far from being reflected in its results.
Starbucks is a good long-term buy for patient investors willing to look past its near-term headwinds. A prolonged trade war could throw a wrench in Starbucks' turnaround, given Starbucks' exposure to China. Starbucks finished fiscal 2024 with 40,199 stores -- 7,596 of which (18.9%) were in China. Starbucks also has a complicated global supply chain, which is vulnerable to trade tensions.
Based on a stock price of $97.73 at the time of this writing, Starbucks has a price-to-earnings (P/E) ratio of 31.5, which isn't cheap. Even if it achieves EPS estimates for fiscal 2026, Starbucks would still have a P/E of 26.8, which is decent but not great.
Starbucks' valuation got a little overextended earlier this year, so the steep sell-off in the stock makes sense. All told, Starbucks isn't a no-brainer buy. But it could still be a fair buy and hold stock for investors looking to pick up some passive income and who believe that its turnaround will be transformational and could help the company kick into the next growth gear.
