After Impressive 5-Year Rally, Is Starbucks Still A Buy?
Investing.com | Feb 10, 2020 16:21
In a persistently low interest-rate environment, income investors have few avenues available through which to make decent returns. Savings accounts pay close to zilch, while the return on government bonds has been extremely low.
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One strategy that worked during 2019 was to invest in quality dividend stocks which were positioned to provide both capital gains and a growing payout. Popular coffee-chain operator Starbucks (NASDAQ:SBUX) was among the biggest gainers in this group: it remained a favorite pick for analysts who predicted its earnings momentum would fuel more gains.
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The impressive, five year rally for the seller of Frappuccinos and pumpkin-spiced lattes makes it a bit more complicated for investors trying to decide whether it's still worth investing in this dividend stock.
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Shares of the specialty coffee purveyor are struggling to reach a new high, after hitting a record peak in July. In fact, they have fallen more than 10% during the past six months. They closed at $86.42 on Friday.
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The recent bearish spell started when Starbucks said on Jan. 28 that it was temporarily closing more than half its stores in China because of the coronavirus outbreak. These closures in its second-largest market, where it operates 4,292 stores, will make it difficult for the Seattle-based company to meet its ongoing 10% growth target in per share income.
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Another development, which was taken by some investors as a sign that the good times are over, came when activist investor Bill Ackman exited his large position in Starbucks, after seeing a return of more than 70% in 19 months.
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The billionaire founder and CEO of Pershing Square Capital Management told shareholders last week that future returns from the chain could “become more modest."
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Starbucks “should continue to generate robust earnings growth through one of the world’s most dominant, attractive and profitable brands,” according to the presentation. Starbucks U.S. same-stores sales have surpassed his expectations, with average growth of 5% over the course of Pershing Square’s investment.
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Besides these temporary setbacks, there's little to suggest that this fantastic consumer growth story is losing its appeal for income investors whose aim is to earn steadily growing dividends. Last month, the company reported strong fiscal 2020 first-quarter earnings results that surpassed analysts' estimates. In North America, Starbucks continues to grow due to its technology-driven innovation, customer reward initiatives and improved store formats. Comparable sales rose 6% in the U.S. and 3% in China during the period.
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On the strategy side, Starbucks remains well on course as the chain wins back coffee-drinkers not only in its home markets, but also in China—a country which has taken center stage in its growth strategy. Starbucks' rewards loyalty program grew to 18.9 million active members in the U.S., up 16% year-over-year during Q1.
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With that growth, Starbucks' growing dividend is another main attraction for income-seeking investors. One rarely finds a dividend stock yielding less than 2% that offers such impressive dividend growth. Starbucks' shareholder payout is currently $1.64 per year, with a yield of 1.9%.
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During the past five years, Starbucks delivered about 23% average dividend growth per share and with a payout ratio of about 50%, that pace of cash return doesn't look likely to slow anytime soon. The stock trades at 29 times forecast earnings, with a long-term estimated earnings growth rate of 12-15%.
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Bottom Line
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We don’t see a big pullback in Starbucks shares in 2020, with the company’s core operating targets well on track. At the same time, we don’t see a repeat of its 2019 performance, especially when the Chinese economy faces a major risk of a slowdown due to coronavirus.
That being said, Starbucks continues to remain an attractive buy-and-hold candidate for income investors, especially with its hefty dividend growth. The current pullback in its share value offers a good entry point.
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