Starbucks Corp. (SBUX, Financial) declared its quarterly dividend on Tuesday, raising its payout to 57 cents per share from a previous 54 cents per share.
The company's dividend raise and robust third-quarter earnings results suggest potential tailwinds might be in store. However, a deeper analysis is required to establish the feasibility of investing in the stock at $95 per share.
Latest earnings and subsequent dividend increase
Starbucks' latest dividend increase amounts to a 7.5% quarter-on-quarter increase, which presents little surprise as the its compound annual dividend growth rate for the past 14 years amounts to 20%. However, it should be considered that companies often determine their dividend policies based on their expected financial performance; as such, Starbucks' latest dividend increase suggests its board believes the company's prospective operating results will be robust.
Trivially speaking, in order to pay sustainable dividends, a company must generate sufficient profits, and Starbucks' third-quarter financial results convey just that.
According to its latest results, Starbucks achieved record revenue amounting to $9.2 billion, which is a 12% year-over-year increase. Much of the company's fundamental support derived from its international markets segment as its same-store sales surged by 24%. Additionally, it achieved a quarterly operating profit margin of 17.4%, trumping the 16.9% it produced in the prior year.
Source: Starbucks' third-quarter results
Concerns about performance in China
Although the company-wide performance is superb, many are worried about its lagging performance in China. In fact, Andrew Charles of Cowen recently opined on the matter, stating: "While we forecast consensus 2023-25E EPS is achievable, in our view the multiple isn't discounted enough vs the 5Y avg that leads us to expect shares will be in a holding pattern,"
In my view, investors are overzealous regarding headwinds from China. Sure, political issues coupled with interim economic stagnation are not beneficial to Starbucks. However, exposure to China is part of a long-term growth strategy with secular growth central to most companies' rationale; moreover, unstable political issues within the region are part and parcel of expanding into an emerging market.
To summarize, it can be reasonably stated that Starbucks' fundamental attributes remain robust, acting against the grain of the economic headwinds embedded within 2023's economy. Moreover, another dividend increase frames the possibility of continued financial outperformance.
Other noteworthy events
In other events, Starbucks visionary Howard Schultz has decided to step down from the board after retiring as CEO merely six months ago. Although Schultz will continue to serve as chairman emeritus, it is clear the compan is in a succession process.
Schultz's outgoing statement read as follows:
"As I reflect on my 41 years with the company, a foundation of love and creative, passionate customer experience has been built by over five million partners (employees) around the world who have worked in the company."
Even though many might be concerned by Schultz's departure, it must be weighed in that Starbucks' corporate strategy will unlikely change. Additionally, the company's dynamics have shifted significantly as it has traversed from a growth entity to a mega company.
As such, I do not expect the succession to yield noteworthy material changes.
Valuation
As for Starbucks' valuation, a discounted cash flow model implies the stock is undervalued by approximately 7.16%.
At face value, the comany's cash flow-based valuation is slightly underwhelming; additionally, Starbucks is trading at 29 times its earnings, which is significantly higher than its average price-earnings ratio of 15.82. Therefore, I fail to conclude that Starbucks presents value at this time.
Guru trades
Further to its valuation, Starbucks' 2023 guru trades remain in net negative territory, with the likes of Joel Greenblatt (Trades, Portfolio), Steven Cohen (Trades, Portfolio) and Jefferies Group (Trades, Portfolio) selling shares in recent months.
While guru trades do not determine a stock's trajectory by themselves, seeing the bearish outlook on Starbucks by some of the world's finest investors is worrisome.
Final word
Starbucks' latest dividend increase presents an interesting talking point as the hike juxtaposes negative sentiment surrounding the company's exposure to China, among other aspects.
My analysis shows the company has produced non-cyclical results in 2023, trumping estimates as few anticipated it to uphold its secular growth pattern during a soft consumer environment. Moreover, the company's latest data implies the bearish outlook on China might be slightly overplayed.
However, despite Starbucks' robust financial results and its compelling dividend, its stock presents little value at this time, which is corroborated by various valuation metrics and recent guru trading activity.
