Starbucks as a Leading Dividend Shares to Acquire in 2025 Due to 5 Significant Factors
Starbucks as a Leading Dividend Shares to Acquire in 2025 Due to 5 Significant Factors
As of the current moment, Starbucks (SBUX 0.43%) has endured a painful 8.7% decrease over the past week. This decline might be due to the escalating prices of Arabica coffee beans and a broader market sell-off.
Starbucks has underperformed year-to-date, despite the advancements in broader indexes. Nevertheless, Starbucks could be on the verge of a comeback. Here are five reasons why Starbucks is a valuable dividend stock to invest in by 2025.
1. A recovery is well in progress
On August 13, Starbucks' stock experienced a nearly 25% surge in response to the news that Brian Niccol would assume the role of CEO. This move highlighted the desperate need for a leadership change within the company. Niccol's impressive track record as CEO of Chipotle Mexican Grill should translate effectively to Starbucks.
During Niccol's first earnings call as Starbucks' CEO, held in late October, he discussed various strategies to restore the company to its roots. Starbucks pioneered restaurant mobile apps and mobile ordering, which significantly increased sales volume and margins, allowing customers to bypass lines and save time. However, mobile ordering also made the Starbucks experience more transactional, placing a considerable strain on employees during peak periods.
A significant element of Niccol's strategy is to transform Starbucks into a "third place," separating itself from work and home where individuals can unwind and appreciate the experience of a handcrafted beverage. Restoring a third place involves enhancing the quality of its food and beverage offerings as well as improving the customer and employee experience. The strategy also involves avoiding price-cutting on certain items. For example, Starbucks has reintroduced free nondairy cream options and is reviving condiment stations for customers to personalize their drinks.
While this strategy makes logical sense, its implementation might prove more challenging than initially anticipated. Starbucks must strike a balance between restoring its brand and preserving the improvements responsible for rapid sales growth in recent years. The understanding that further improvements may take time might be the reason for the stock price remaining stagnant since Niccol's announcement in August.
2. Starbucks has identified methods to boost productivity
Long-term investors recognize that positive change takes time. In order to change a business, it's essential to get the strategy right and chart a course towards sustainable future growth rather than rushing the process and needing to restart the turnaround.
Starbucks enters the new year with a strong momentum. As seen in the chart, sales are approaching an all-time high, and operating margins have fully recovered from the COVID-19 pandemic:
However, margins are still below pre-pandemic levels. Improving order processing systems is one method to enhance margins. During the earnings call for the fourth quarter of Starbucks' fiscal 2024, which ended on September 29, Niccol discussed the Siren Craft System, which includes improvements to reduce wait times and improve the customer experience. Niccol also highlighted supply chain enhancements that could enable Starbucks to lower costs and boost margins.
It's worth noting that neither of these improvements necessitates price increases to grow margins. In recent years, Starbucks has overly relied on price increases to compensate for inflationary costs and boost near-term profits. However, price increases have their limitations, especially with food and beverages, as there is an abundance of alternatives.
3. There is room for improvement in China
Starbucks has long aspired to have more stores in China than in the U.S. In 2017, former CEO (and Starbucks founding father) Howard Schultz predicted that China would someday have twice as many locations as the U.S. As of the most recent quarter, however, Starbucks locations in the U.S. still surpass those in China.
China has not been performing well recently. Starbucks has experienced three consecutive quarters of year-over-year declines in same-store sales in key markets.
In retail, it's important to recognize that not all revenue growth is equal. The best type of revenue growth comes from same-store sales, as it demonstrates the strength of the underlying product. New store openings and price increases can help sales growth in the short term, but if comparables are declining, they may result in lower margins.
Sure enough, Starbucks opened 722 new stores in its most recent quarter, increasing the overall store count by 1.8%. However, despite the new store openings, overall revenue still fell by 3% due to the decline in same-store sales.
China is critical for Starbucks' resurgence. It’s not the only company facing challenges in the region. The Chinese economy, particularly in discretionary goods spending, has taken a hit. Keep a close eye on how Starbucks navigates China and whether the new management can rekindle growth.
4. Starbucks has a stable and growing dividend
Starbucks is no longer the high-growth stock it once was. The company has evolved into an established industry leader, offering moderate growth and a steady dividend.
That dividend is a crucial aspect of the investment thesis for the stock. On October 22, Starbucks announced its 14th consecutive yearly dividend increase, raising its quarterly payout to $0.61 per share. During that period, Starbucks has raised its dividend at a compound annual growth rate of around 20%, although recent increases have mainly been in the high-single-digit range.
Large and persistent increases in dividends, coupled with a sluggish share price, have pushed Starbucks' yield to 2.7%, surpassing the 1.2% dividend yield of the S&P 500 significantly. The yield from Starbucks is also higher than those of established, dividend-paying companies like Procter & Gamble, and it's almost at par with Coca-Cola's yield. Starbucks' dividend serves as a compelling reason to stay invested in the stock and maintain patience during its transformation phase.
Starbucks offers a compelling investment opportunity
Starbucks appears to be a sound investment in a market that generally touts high prices. Its price-to-earnings (P/E) ratio is lower than its 10-year median, while its price-to-sales (P/S) ratio is significantly below the 10-year median.
Although some might argue that Starbucks should have a lower P/S ratio due to slower growth rate and lower profit margins, if Niccol's strategies bear fruit, leading to cost reductions from internal improvements and a return of same-store sales growth in key regions such as the United States and China, the stock could soon appear ridiculously cheap.
Starbucks is a well-balanced buy for 2025
Starbucks has underperformed long-term shareholders for quite some time now. In the past five years, its stock price has barely risen by 4.4%, contrasting sharply with the S&P 500's impressive 89.4% gain.
Some investors might prefer to observe how Starbucks overcomes internal difficulties, resurrects its brand, and tackles economic challenges in China. However, if you are confident that Starbucks is on the brink of a comeback, the current price to purchase this high-quality dividend stock presents an excellent investment opportunity.
- Despite the challenges, Starbucks' strong cash flows and focus on financial discipline make it an attractive option for investors looking to diversify their portfolio, particularly in the finance sector.
- With the company's commitment to divesting from non-core businesses and real estate optimization strategies, Starbucks aims to allocate more funds towards investing in its core operations, which could potentially boost shareholder returns over the long term.