On Oct. 22, Starbucks(NASDAQ: SBUX) announced its 14th consecutive annual dividend increase, boosting the quarterly payout by 7% to $0.61 per share or $2.44 per share per year. Starbucks started as a growth stock but has since transformed into a highly reliable dividend stock with a forward yield of 2.6%. The dividend has become a core part of Starbucks' investment thesis. Like clockwork, investors have been able to count on annual raises every September or October.
Here's why Starbucks shares were actually down the morning of Oct. 23, and whether the dividend stock is worth buying now.
Image source: Getty Images.
Starbucks in the spotlight
Starbucks investors have been on a roller coaster in 2024. The stock plummeted in May after reporting disappointing second-quarter results. The third-quarter results weren't much better, but at least they indicated Starbucks may have begun to correct course.
On Aug. 9, reports surfaced that activist investor Starboard Value had taken a stake in the company, a sign that a shake-up could be in order. Then, the big news came on Aug. 13 when Starbucks announced it had poached the highly esteemed Chipotle Mexican Grill CEO, Brian Niccol, to become the new chairman and CEO of Starbucks. The stock climbed a staggering 25% on Aug. 13, its best single-session performance in history.
On Sept. 10, Niccol wrote a letter titled Back to Starbucks, which discussed the power of the brand, a return to the coffeehouse style that made it beloved in the first place, and a renewed emphasis on quality ingredients and passionate baristas.
The stock price had mostly retained its Aug. 13 gains, a sign of optimism that investors were looking forward to the fourth-quarter and full fiscal 2024 report on Oct. 30, rather than dreading it. That is, until Starbucks pre-announced its quarterly results on Oct. 22.
A painful reminder
Companies will sometimes choose to announce preliminary results when they want to cushion the blow from a bad earnings report or to simply draw attention to the future rather than the past. That certainly seems to be what Starbucks is doing, given its terrible results.
The preliminary results showed a 7% global comparable-store sales (comps) decline; a 3% decline in consolidated net revenue; and a drop of $0.80 in earnings per share (EPS), representing a decline of 25% under generally accepted accounting principles (GAAP) and 24% on an adjusted, or non-GAAP, basis.
For the full fiscal year, comps were down 2%; consolidated net revenue was up 1%; and both GAAP and adjusted EPS were $3.31, down 8% on a GAAP basis.
Starbucks was coming off a record year with $36 billion in sales and $3.58 in EPS. But despite that banner year, the stock price had languished because the results weren't all that impressive compared to pre-pandemic figures, and growth prospects (especially in China) seemed to be weakening.
As you can see in the chart, results rebounded nicely from a brutal 2020, but fiscal 2024 earnings weren't that impressive compared to pre-pandemic years due to lower margins.
SBUX Revenue (Annual) Chart
In addition to the preliminary results and the dividend raise, Starbucks released a video of Niccol titled The Path Forward. He didn't shy away from the bad results, likely in an attempt to make it clear those results only partly came under his tenure as CEO and that the future would be different. He said the following in the video:
People love Starbucks, but I've heard from some customers that we've drifted from our core, that we've made it harder to be a customer than it should be, and that we've stopped communicating with them. As a result, some are visiting less often, and I think today's results tell that same story. To welcome all our customers back and return to growth, we need to fundamentally change our recent strategy.
The upcoming earnings call will be a chance for Niccol and the rest of the management team to prove to analysts why the path forward will be one worth taking for investors. Specifically, they should watch to see how the CEO touches on improvements to the customer and employee experience, the cost of those improvements, and if they coincide with remodeling stores or building new ones to resemble the classic cafe style. Maybe we'll get new food and drink offerings to enrich that style.
The company's second biggest market, China, had been its greatest growth catalyst but has since turned into its biggest pain point. In the video, Niccol said that the U.S. would be the priority in the near term and Starbucks would focus on returning China and the rest of the international business to growth.
All told, the message calls for Starbucks to return to its roots and restore its brand.
The turnaround is far from complete
Starbucks is at a crossroads. The stock is roughly the same price today as it was five years ago, and investors are growing impatient with the company's overpromising and underdelivering. It desperately needed new leadership, and Niccol could be the person to steer the ship in the right direction. But until there are meaningful signs of improvement, the company will likely remain in wait-and-see mode.
The good news is that the results aren't terrible. The company is still highly profitable and can more than afford its dividend with earnings. The yield is solid, especially compared to what investors can get from a consumer discretionary exchange-traded fund or an S&P 500 index fund.
Investors who believe in the brand and agree with Niccol that its problems are solvable may do well to buy shares of the coffee chain. But Starbucks could remain a volatile stock until it lays its new foundation and Wall Street digests management's plans for the company's future.
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Daniel Foelber has positions in Starbucks. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
