One of the potentially lucrative ways to participate in a dividend growth strategy is to buy a company with a "maturing dividend" (that is, the dividend growth rate is greatly exceeding the earnings growth rate by design, as management decides to give more and more money to shareholders) and enjoy high dividend payouts five to ten years from now in relation to the actual amount of cash that you deploy.
One such company that grants investors the opportunity to participate in that phenomenon is Starbucks (SBUX), which did not begin paying out a dividend until 2010 and now has a three-year record on the books of making substantial dividend increases.
In 2010, Starbucks paid out $0.36 in dividends. Then, it paid out $0.56 in 2011, $0.72 in 2012 and over the course of 2013, Starbucks has decided to put $0.89 in the pockets of shareholders. The current dividend of $0.26 per share projects an annual payout of $1.04 per share.
This is why it is lucrative to get in the habit of looking out a few years to where a dividend might be. In 2010, Starbucks traded at an average price of $27.25 per share. When you collected $0.36 in 2010 (the dividend was not initiated until the second quarter), you might have found it unimpressive to be collecting 1.32% in immediate cash profits on your investment. But then fun accelerated with time: as we sit here at the end of 2013, just three years later, that initial investment is now generating 3.81% on the amount of money you invested, rather than the tiny 1.32% you saw at the outset.
The capital gains have been quite nice, too: that $27.25 average price in 2010 has grown to over $78 now, for a capital gain of 186% in just under three years. A small initial yield can often mask the growth in dividends and capital appreciation that lay ahead five to ten years down the road for the investor who has time to be patient before starting to draw on the dividend income.
Even though a lot of dividend growth at Starbucks has already happened over the past three years, that does not mean that the rocket ship effect in which dividend growth outpaces earnings growth has come to an end. Even with a $1.04 annual dividend payout, Starbucks still possesses an earnings power base of $2.26 per share, for a payout ratio of 46%.
The interesting thing about Starbucks is that the earnings per share growth has a tendency to perform better than you'd initially expect. For instance, when a recession strikes, one of the most common advice tropes is that you should give up your daily morning coffee. Whether that is good wisdom or not, Starbucks still managed to grow profits during the financial crisis from $0.71 per share in 2008 to $0.80 per share in 2009, for a 12.67% percentage increase. That 12%-13% earnings growth in the pit of the recession proved to be more resilient than many of the blue-chip companies that I happen to personally admire.
And when good economic times hit, Starbucks' growth tends to really take off. Right now, Starbucks is growing profits per share at its existing stores by slightly under 8%. Not only is this retail portion of the company growing, but Starbucks seems to finally be making significant investments in its consumer packaged goods department, which only represents 12% of the company right now. When you look at the joint ventures with Pepsi and Dreyer's to develop bottled drinks and ice cream brands sold at supermarkets, as well as Starbucks asserting ownership of its distribution network by ending a partnership with Kraft, it is almost as if Starbucks has this little secret weapon in its arsenal growing at 15-20% per year. It doesn't get as much attention as the same-store traffic increases in the United States, or the prospects of saturating the Chinese market with Starbucks outlets, but it is sitting right there in the numbers: a consumer packaged goods division that is growing quite healthily and contributing double-digit growth to the Starbucks' bottom line.
I think Starbucks ought to deserve a spot on the short list of companies that might grow its dividend by 10% or more on average over the next five to ten years. You have coffee prices remaining low, you have rapid growth in China, you have 7% same-store sale increases in the United States, you have a consumer packaged division that only accounts for 12% of business but is hitting its stride, and you have a payout ratio drifting from the 40% range towards the 60% range (long-term) as the demands on the company's cash flow remain under control. And the best thing of all is that the company's profits have proven recession resistant as the company experienced 12.67% growth from 2008 to 2009. If you are searching for companies with high dividend growth rates, Starbucks might deserve a spot on your shopping list when you can get it at the right price.