Starbucks (SBUX) is an American multinational coffeehouse chain. It’s considered the largest coffeehouse chain in the world and possesses an extraordinary brand considering the competitive sphere it operates in. I am neutral on the stock.
Cost Concerns
Starbucks released its fourth-quarter earnings report earlier this month and missed on its earnings per share estimates by $0.08. This comes as a consequence of higher input costs that have now exceeded levels that can be passed through to the consumer without causing diminishing demand.
The company’s deteriorating income statement is of great concern to Wall Street analysts. Goldman Sachs cut its Starbucks rating from Buy to Neutral, with the bank’s analyst Jared Garber stating the following: “We view the stock’s upside is limited given the continued cost pressures across the business, potential choppiness in U.S. trends/lapping dynamics, and a still-unclear recovery in China.”
Cowen also slashed its price target from $125 to $115, and according to their analyst, Andrew Charles: “We commend the multi-year EBIT margin guidance that includes a return to long term 18%-19% in 2024, suggesting 18.4% consensus is safe,”
Dividend Safety Analysis
Many touted Starbucks as a solid inflation play a few months ago because of its market dominance and its dividend attributes. Starbucks has a forward dividend yield of 2.09%, which needs to be considered in context with the stock’s three-year dividend growth rate of 10.9%.
However, Starbucks’ dividend prospects remain uncertain as dividend safety matters aren’t lining up well, especially considering rising input costs. Starbucks’ cash-flow-to-payout ratio and dividend payout ratios remain elevated, and both trade ~100% higher than industry averages.
Furthermore, Starbucks’ dividend coverage ratio is 1.7 compared to the industry average of 4.1, suggesting that it’s extending itself to meet shareholders’ demands relative to the rest of the industry.
Valuation
The dearth of undervalued consumer discretionary stocks should mean that Starbucks’ valuation comes as no surprise. The stock is priced-in relative to its five-year average with its price-to-earnings (28.2) and price-to-sales (3.7) multiples trading just slightly below historical averages.
Starbucks is undervalued by 36% relative to its historical cash flow multiple, but this should be considered a non-event because of its concerning dividend capacity.
Wall Street’s Take
Turning to Wall Street, Starbucks has a Moderate Buy consensus rating, based on 13 Buys and 11 Holds assigned in the past three months.
The average Starbucks price target of $116.22 implies 24.2% upside potential.
Concluding Thoughts
I’m not suggesting that Starbucks is a Sell just yet; however, there’s a fair argument that this is a risky bet at the moment and that dividends are unreasonably elevated.
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