Starbucks: Not Cheap, But Prospects Look Robust

Starbucks Corporation (SBUX), the iconic coffee company with nearly 34,000 stores globally, has seen its shares trade relatively flat over the past six months.

While the company suffered temporarily during the COVID-19 pandemic amid international lockdowns and restrictions imposed on physical locations, Starbucks’ financials have recovered dramatically over the past few quarters, with the company’s profitability hitting very satisfactory levels.

In the current environment of ultra-low yields, Starbucks remains a rather attractive pick, in my view. Currently, at around 1.8%, the stock’s yield may not look that hefty, however, dividend growth continues to be robust and is likely to remain so backed by an expanding bottom line. I am bullish on Starbucks. (See SBUX stock charts on TipRanks)

Q3 Results: Strong Improvements

Starbucks reported very strong FQ4 results, with revenues growing 31.3% year-over-year and 8.7% quarter-over-quarter to $8.15 billion. The company also posted GAAP EPS of $1.49, up 122.3% compared to FQ4-2020 and up 53.6% sequentially. Non-GAAP adjusted EPS was also satisfactory, at $1.00, in line with consensus estimates.

To put this into perspective, FQ4 marked a new all-time high revenue record for the company, while the $8.15 billion is also 20.8% higher than the company’s FQ4-2019 (i.e., its pre-pandemic levels), meaning that the company has not just recovered, but grown considerably throughout the pandemic despite the challenges.

With Starbucks growing its operations, economies of scale kick in gradually, resulting in expanding gross and EBIT margins. Gross margins came in at 29.8% compared to 26.2% last year. EBIT margin was also strong at 17.9%, versus 11.6% in FQ4-2020. Hence, we can see why EPS skyrocketed during the quarter.

Valuation, Dividend Growth

At around $112, Starbucks is trading at around 32 times the company’s FY2022 EPS estimate of $3.44. While that’s admittedly a rich multiple and prominently higher than the stock’s historical average, analysts expect double-digit EPS growth in the coming years driven by ongoing momentum. This could somewhat justify the valuation. Starbucks’ overall qualities and brand value are likely to keep attracting a premium valuation as well.

Solid EPS growth in the coming years should also allow management to retain Starbucks’ strong DPS growth. Starbucks’ three-year DPS CAGR (Compound Annual Growth Rate) stands at 11.7%. The latest increase back in September was by 8.9% to an annualized rate of $1.96. This implies a payout ratio of around 56.9% on next year’s expected earnings, which is a rather comfortable ratio, leaving plenty of room for future DPS increases.

The present yield of 1.80% is not too rich. However, taking into account the company’s growth prospects and low-yield environment, it makes for a fine supplementary tangible capital return.

Management also appeared confident enough to restart its share buyback program. Specifically, they mentioned that they will “return $20 billion to investors over the next three years through share repurchases and dividends.” This is a bullish indicator because the company essentially agrees that its stock is not overvalued. If that were the case, we would have likely seen a stronger, double-digit dividend increase and more modest buybacks, if any.

Wall Street’s Take

Turning to Wall Street, Starbucks has a Moderate Buy consensus rating based on 14 Buys, 8 Holds, and 0 Sells assigned in the past three months. At $124.24, the average Starbucks price target implies 10.6% upside potential over the next 12 months.

Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.