The discussion of value versus growth stocks gets a lot of attention. Regardless of what side you fall on, it’s hard to deny the fact that many investors out there simply just want steady income from the companies they own. These dividends can be a reliable source of returns from profitable and durable businesses.
As of this writing, there’s one well-known dividend stock that trades 15% off its all-time high from July 2021. Does this make now the right time to buy it?
Dividend track record
In the past decade, Starbucks (SBUX -1.21%) has posted an average operating margin of 14.5%. While that’s an impressive track record of profitability, it’s worth mentioning that the company has reported positive earnings for decades. That’s a clear indication that its business model works.
After investing in new store openings or upgrades, supply chain improvements, and tech and digital capabilities, management is left with excess cash. The result is a dividend yield of 2.25%.
Perhaps even more notable, Starbucks has raised its quarterly payout in 14 straight years. The three-month distribution soared 1,120% from $0.05 in 2010 to $0.61 in 2024. This increase can definitely draw the attention of dividend investors.
Trying to right the ship
Starbucks’ ability to consistently pay its shareholders more in dividends masks its ongoing struggles. The business just reported a year-over-year same-store-sales decline of 4% in the first quarter of fiscal year 2025 (ended Dec. 29, 2024). This was the fourth straight quarter of a dip for what is an extremely important financial metric.
The blame rests on falling foot traffic. The number of transactions fell 8% in the U.S. and 2% in China, the company’s two most important markets, in the first quarter.
Luckily, Brian Niccol, the new CEO hired last September, understands what needs to be done to right the ship. Simplifying the menu, reducing discounts and promotions, providing baristas with the tools they need to succeed, and improving the customer experience are all in focus.
It isn’t all bad news, though. With almost 41,000 stores across the globe, Starbucks dominates the retail coffee industry. Its huge physical footprint and sales base, with trailing-12-month revenue of $34 billion, allows it to invest heavily in technology and marketing initiatives, while also benefiting from certain cost advantages that smaller rivals might not be so lucky to have.
Supporting Starbucks’ competitive position is its strong brand presence, a key asset Niccol wants to foster. Despite its recent challenges, this company is still well known across the globe. Its premium position still resonates with consumers. That certainly has value in what is an otherwise competitive market.
Valuation and uncertainty
Niccol is unsurprisingly optimistic about the direction the company is heading in. On the Q1 2025 earnings call, he said, “U.S. category share among … [quick service restaurants] also recovered in Q1, following two quarters of decline.” That’s an encouraging trend.
But Starbucks isn’t in the clear yet. Management didn’t provide financial guidance for fiscal 2025, which demonstrates the amount of near-term uncertainty there is. For what it’s worth, Wall Street consensus analyst estimates call for earnings per share to fall 9% this year, which is a disappointing outlook.
It appears as though the strategic improvements will take time to trickle to Starbucks’ financial performance. But there should be no fears about the dividend.
“We continue to prioritize shareholder value through dividends, providing a predictable return of capital while we turn around our business,” CFO Rachel Ruggeri said on the call.
Starbucks shares have climbed 45% since early August. As a result, the current forward P/E ratio of 35 isn’t exactly a bargain. Perhaps investors should wait until the company reports stronger fundamentals before adding the dividend stock to their portfolios.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Starbucks. The Motley Fool has a disclosure policy.
