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Summary

  • Starbucks currently has a dividend yield of 1.4% and a market cap of $56 billion.
  • The first half of the current fiscal year shows a dividend coverage ratio of 3.3x.
  • With the company pushing into China and the food business across the US, inventories seem to be under control as the Cash Conversion Cycle has not materially changed.

The scope of this article will look at the financial health of Starbucks (NASDAQ:SBUX), and the ability to continue to pay the dividend. While investors may see the current yield of 1.4% as unattractive, the continued growth of the company, the powerful business model and the ability to raise the dividend mandates that dividend growth investors give this stock another look.

Revenue Components

Starbucks generates nearly all revenues through company-operated stores, licensed stores, consumer packaged goods ("CPG") and foodservice operations.

Starbucks at a Glance

Five Year Financial Summary

(Amounts in Billions)

FYE 9/29/13

FYE /30/12

FYE 10/2/11

FYE 10/3/10

FYE 9/27/09

Net sales

$14.9

$13.3

$11.7

$10.7

$9.8

Cash provided by operating activities

$2.9

$1.8

$1.6

1.7

$1.4

Capital expenditures

$1.2

$0.9

$0.5

$0.4

$0.4

Company-operated and Licensed Store Summary as of September 29, 2013

Company operated stores

10,194

Licensed stores

9,573

Total

19,767

How Safe is the Dividend?

Cash flow summary ($ in millions)

Two Quarters

Ended 3/30/14

Cash from operations

($984)

Capex

($504)

Free cash flow (see Legal Proceedings below)

($1,488)

Proceeds from long term debt

$749

Dividends

($392)

Repurchases of common stock

($290)

The cash and short-term investments at 3/30/2014 was $1.49 billion.

Legal Proceedings

The negative free cash flow above was due to a recent arbitration case with Kraft (NASDAQ:KRFT).

In the first quarter of fiscal 2014, Starbucks paid $2.8 billion to Kraft and fully extinguished the litigation charge liability. If this $2.8 billion is added back to the free cash flow figure in the above chart (negative $1.5 billion), the Adjusted Free Cash Flow figure is about $1.3 billion.

Given $1.3 billion in adjusted free cash flow, and $392 million in dividends, the dividend coverage ratio is about 3.3x. For more comparisons on other large cap dividend coverage ratios, see this article on AT&T (NYSE:T) or this article on Verizon (NYSE:VZ)

Cash Conversion Cycle

In a recent series of articles, I've looked at the financial health of various companies: Wal-Mart (NYSE:WMT), Amazon (NASDAQ:AMZN), IBM (NYSE:IBM) by analyzing the cash conversion cycle. Given the amount of coffee utilized in the operations, let's look at how Starbucks is performing from an inventory control perspective.

Two Quarters ending 3/30/14

FYE 9/29/13

FYE 9/30/12

Amounts in Millions of $

$8,113

$14,892

$13,300

Sales (Company stores, Licensed stores, Consumer Products)

$590

$561

$486

A/R

13.3

13.8

13.3

[A] Days receivables {(Receivables/Sales)*365 days for full year or 182.5 for 1/2 year}

Two Quarters ending 3/30/14

FYE 9/29/13

FYE 9/30/12

$5,734

$10,668

$9,731

Cost of sales and Store Operating Expenses

$955

$1,111

$1,242

Inventory

30.4

38.0

46.6

[B] Days inventory {(Inventory/Cost of Sales)*365 days for full year or 182.5 for 1/2 year}}

$5,734

$10,668

$9,731

Cost of sales and Store Operating Expenses

473

492

398

Accounts payable

15.1

16.8

14.9

[C] Payable Days {(Payables/Cost of Sales)*365 days for full year or 182.5 for 1/2 year}}

28.6

34.9

45.0

Cash conversion cycle {a+b-c}

The cash conversion cycle is the amount of time between a company spending cash and receiving cash per each sale. It is a measure of efficiency and how long cash is tied up in working capital. The CCC is a great way to analyze the efficiency of the organization in managing cash to generate more sales.

In FY 2013, SBUX held inventory for 38 days plus 14 days to collect receivables or 52 days in total. SBUX pays accounts payable in 17 days, thus achieving a 35 day cash conversion cycle.

Food Is A Tremendous Opportunity

For Starbucks, only 1/3 of retail transactions in the U.S. include food. Starbucks, which first began selling sandwiches in 2003, bought the owner of La Boulange bakery in 2012 to improve its selection of scones, muffins and cookies. About 60 percent of sales now come after 11 a.m., compared with about 50 percent a year ago.

Starbucks plans to introduce new lunch sandwiches nationwide in September 2014. Starbucks is also experimenting with approximately 1,000 Evening Stores over the next several years. Starbucks' Evenings stores provide a casual venue for customers to relax and enjoy coffee, hand-selected wine, beer and shareable small plates of food.

Lunch is the latest battleground in an increasingly competitive industry. McDonald's (NYSE:MCD) has attacked the coffee business, increasing pressure on SBUX to fire back at traditional fast-food bastions. Furthermore, coffee chains are challenging sit-down restaurants by revamping their decor and - in Starbucks' case - offering alcohol and tapas.

Starbucks also is gunning for the lunch customer. It began offering new sandwiches in 178 cafes in Phoenix and Richmond, VA, on May 6. The test includes a grilled-chicken sandwich, topped with bacon and swiss, for $5.95, a grilled cheese for $5.25, and a beef brisket and cheddar baguette for $6.95.

Conclusion

I conclude that the SBUX dividend is safe for 2014 and into 2015, primarily due to the high dividend coverage ratio and the continued ability to increase prices at the company operated stores. SBUX trades at a large premium to the S&P 500. The trailing P/E ratio is about 33x compared to an S&P 500 index trading at almost 18x. Also, note that SBUX has a below market dividend yield of 1.4% compared to an S&P 500 dividend yield of 1.7%. Due to the strength of the operating results and the capacity to raise the dividend, I rate this stock a Buy.

This article did not cover the significant risks that SBUX will face as it continues to expand globally. Across the U.S., China and Europe, SBUX might encounter construction cost increases associated with new store openings and remodeling of existing stores. Also, with the high growth rate, management has noticed a lack of desirable real estate locations available for lease at reasonable rates.

The above article is an opinion, and not investment counsel.

Source: Starbucks' Dividend Should Continue To Grow