Seeking Alpha
Long only, deep value, growth at reasonable price
Profile| Send Message|
( followers)  

Summary

  • Average annual growth in dividends of about 32% over the last five years.
  • Low payout ratio and healthy growth in cash flows should allow the company to grow its dividends in the future.
  • Elevated inventory levels should give Starbucks an advantage in the expected shortage in the near term.

Starbucks Corporation (NASDAQ:SBUX) is a roaster, marketer and retailer of coffee, operating in more than 60 countries. The company has a history of expansion and sells handcrafted coffee, tea and other beverages with a variety of other fresh food items. Starbucks has been performing exceptionally well over the last few years, and it is again set to have a strong year. However, some investors are worried about high one-time operating cost in the last year, which dragged the net margins to the lowest in five years, but the robust growth in operational cash flows has minimized the effect. In this article, we will discuss the dividends, dividend growth and future prospects of the company.

Dividend Growth

Starbucks started paying dividend in early 2010, and since then, the company has increased its quarterly dividend on consistent basis. The company has been growing its quarterly dividends at an average annual growth rate of about 36% over the last five years. At the moment, Starbucks pays an annual dividend of $1.04 per share, yielding 1.3%. Over the last year, the company distributed cash dividends of $629 million. Moreover, the company also bought back shares worth $588 million, which takes the total cash returned to shareholders to $1.22 billion.

Moving on to the payout ratio - the payout ratio based on free cash flows for Starbucks is pretty strong - the total dividends paid for the last year were $629 million and the free cash flows for the same period were $1.76 billion, which puts the payout ratio at around 36%. The payout ratio of the company is considerably low and it provides Starbucks enough room to grow its dividends in the future. Starbucks increased its operational cash flows by of 66% during the last year, with an increase of 35% in capital expenditures. The growth in operational cash flows with a low payout ratio should enable Starbucks to ensure the sustainability of its dividends in the long run. We have compared Starbucks with other industry peers such as: Darden Restaurants (NYSE:DRI) and Cracker Barrel Old Country Store (NASDAQ:CBRL).

Dividends per share

Average growth in five years

Dividends paid (Millions)

Free cash flows (Millions)

Payout Ratio

Starbucks

$1.04

32%

$629

$1760

36%

Darden

$2.2

24%

$258

$264

98%

Cracker Barrel

$3.0

55%

$45

$134

34%

Source: Morningstar and SEC Filings

Cracker Barrel has been growing the dividends at a higher rate than Starbucks over the last five years, and the company has lower payout ratio as well. However, Darden's average growth lacks in comparison to its peers and has the highest payout ratio, which might result in slower growth in dividends in the future. Starbucks, on the other hand, has strong free cash flows and low payout ratio which will give it adequate room to grow its dividends.

Future Prospects

Over the past few years, the demand for coffee has substantially increased due to several factors including colder winters and the huge demand by the corporate customers. Starbucks generated record revenue of $14.9 billion during the last year - however, the operating income was negative for the company due to the settlement of $2.7 billion with Kraft Foods (NASDAQ:KRFT) regarding the distribution dispute.

In the short term, the multi-billion industry of coffee restaurants may face some troubles due to the supply shortage of coffee. Brazil is the leading producer of coffee in the world, catering one third of the total coffee demand. The country is facing the climate changes, which might have an impact on the coffee plantations - it takes years for a plantation to reach maturity and the climate change can impact the yield of the plantation.

However, the company has reassured the investors by announcing that it has more than a year's supply of physical inventory - a look at the balance sheet also shows a rather larger increase in inventories over the last two years, and it looks like the trend will continue. If the inventory planning is efficient; Starbucks should have a competitive advantage in case of a shortage.

As mentioned earlier, Starbucks has a history of organic growth with a constant pattern of increasing its footprints in the developing markets. The company derives a major portion of its earnings from its Americas region; however, Starbucks is aggressively expanding its operations around the world. The company also struck an agreement with Keurig Green Mountain (NASDAQ:GMCR) to continue expansion in the coffee market with the help of latest technological update in coffee machines provided by Keurig. Moreover, according to a new research conducted by American Association for the study of Liver Diseases, the consumption of two or more cups of coffee everyday will reduce the risk of liver cirrhosis mortality rate by 66%. This research will also have a positive effect on the industry and might result in increased revenues and earnings for the companies operating in the industry.

Conclusion

Starbucks Corporation is the largest coffee retailer with worldwide operations and strong financial background. The decline in earnings was due to a one-time event, and we expect the company to continue its earnings growth. Furthermore, the analysis of the cash flows shows that there are enough resources available to the company to expand and grow its dividends simultaneously. The growth in dividends remains strong for the company and we believe it is a strong investment for both growth and income investors.

Source: Is Starbucks A Good Dividend Pick?