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By Bret Kenwell
| February 28, 2017
4028mdk09 via Wikipedia
Who doesn’t like a juicy dividend yield between 3% and 4%? I know I sure do. And while a number of companies — like The Coca-Cola Co. (KO) and Procter & Gamble (PG) — sport such a yield, the valuations surely don’t appear to be a bargain. I’m not here to argue the merits of these stocks though. Instead, I’m more excited by a trio like Visa Inc. (V), MasterCard Inc. (MA) and Starbucks Corporation (SBUX).
Despite mediocre earnings growth, Coca-Cola and PG trade with respective forward price-to-earnings ratios of 21 and 22. Similarly, V, MA and SBUX stock trade with forward P/E ratios of 23, 22 and 23, respectively. However, they are often times lauded as being highly overvalued despite their strong brands and growth.
Specifically with Starbucks, a number of investors now claim its growth run is over. Why? Because its recent same-store sales grew less than 5% in the U.S. While 23 times expected earnings is not cheap, I don’t agree that Starbucks stock is overvalued given its growth, brand and dividend.
Many investors say high-quality companies and consistent dividend-payers trade with a premium valuation. It’s why companies like Coca-Cola and PG trade at a lofty earnings-based valuation.
However, I believe SBUX stock belongs in this camp as well. Not only is it a premium high-growth company, it’s also got a dividend worthy of attention.
Data is as of February 27, 2017, unless otherwise indicated. Click on symbol links in each slide for current share prices and more.
byLorena via Flickr (modified)
On April 5, 2010, Starbucks paid its first quarterly dividend of 5 cents per share on a split-adjusted basis. Pretty impressive, right?
While the initial payout may not have anyone’s jaw laying on the floor, the rate in which the company has upped that payout is a bit more noteworthy. In November 2016, SBUX stock paid a 25 cents dividend, a 25% increase from its prior dividend of 20 cents per share. Since its first dividend through its most recent, the company’s compound annual growth rate is more than 26% when it comes to dividend increases.
Imagine getting that kind of raise at work!
Starbucks’ lowest dividend increase came in fiscal 2013, when it “only” grew 17.6% from 8.5 cents to 10 cents per share. Starbucks has a payout ratio of just 43%, meaning there’s plenty of room for dividend increases in the future. That’s even if its bottom line were to sport flatlining growth.
That’s why it’s not unreasonable to say that within five years, Starbucks stock could easily be paying an annual dividend of $2 per share.
Faye via Flickr
Starbucks is not the cheapest stock on the block, but it’s certainly not the most expensive company out there.
It is still expected to grow earnings 11.5% this year and more than 15% next year. Average sales growth over that time frame nears double-digits. Management also reiterated its five-year plan in December. This includes 15% to 20% annual EPS growth, 10% annual revenue growth and mid-single digit comparable-store sales growth.
This may not be the time to delve into Starbucks’ robust business in China. But to make a long story short, the company is opening a new store every 15 hours and expects to operate more than 5,000 locations by 2021. Management believes China will eventually be a larger market than the U.S. for Starbucks.
Throw in its consistent U.S. business and quickly-growing dividend and it’s easy to see why Starbucks stock is priced with a premium valuation.
While its dividend yield is just 1.75%, that’s not bad given all the company’s positives. Starbucks is still growing in impressive fashion and management clearly has a focus on returning capital to shareholders.
Despite the short-term bumps and bruises, I expect SBUX stock to be a dividend titan down the road.
This article is by Bret Kenwell of InvestorPlace. As of this writing, he held none of the aforementioned securities.
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