With Starbucks (NASDAQ:SBUX) having a yield of just 1.2%, many investors may feel that it is simply too low to merit purchase for its income return at the present time. (That's especially the case since the S&P 500 has a yield of around 2% right now.) And with interest rate rises ahead even though the Federal Reserve is becoming increasingly dovish, the appeal of a 1.2% yield may seem even more limited to some investors.
However, we think that Starbucks has the potential to become an excellent yield play moving forward, since it has a number of key catalysts which we believe will cause its profitability to rapidly rise. And when these factors are combined with a payout ratio of just 41%, we think there is scope for higher dividends due to both growing profit and paying out a higher proportion of that profit out as a dividend.
A key catalyst to push Starbucks' profitability northwards is its customer loyalty programme. In fact, we think this could prove to be a game changer for Starbucks' bottom line and for its share price, since a rise in the former is likely to lead to a sharp rise in the latter.
Certainly, a number of major companies have loyalty cards and they have often proved popular among customers. However, Starbucks' loyalty scheme appears to be more popular than most, with around 17% of US adults receiving one as a gift in the holiday season and almost $2bn loaded on to them in the first quarter of the current financial year. This shows that Starbucks' loyalty scheme has excellent penetration among the company's customer base and is likely to cause a substantial rise in repeat business moving forward, which could boost sales and profitability.
In addition, having such a large amount of data provides Starbucks with the means to refine its business model so as to become increasingly efficient and more profitable. For example, it has the capacity to better target its products given consumer spending patterns and behavior, with more consistency and more reliable results possible for product launches and new store openings. As such, Starbucks should be able to maximise its business model and product offering so as to deliver greater profitability which should positively catalyse dividends and its share price moving forward.
Another potential catalyst is expansion in the number of Starbucks stores worldwide. Even though Starbucks is a well-established business which has become the premier retailer of specialty coffee in the world, it continues to open new stores at a rapid rate. For example, in the first quarter of the year it opened 528 net new stores across the globe and with 53% of them being in the Asia-Pacific region, it is clear that the emerging world presents a major growth opportunity for Starbucks.
In fact, revenue in China/Asia Pacific increased by 32% in the first quarter of the year, which shows that the region is likely to be a major driver of the company's top and bottom line moving forward. And with there being a reduced chance of multiple interest rate rises over the coming months, the prospects for a weaker US dollar are higher, which means that Starbucks could gain a currency translation boost from its sizeable international operations.
As well as its international exposure and loyalty card having the potential to drive Starbucks' profitability and share price higher, we think that the company's adoption of new technology could act as a further positive catalyst. For example, Starbucks has embraced mobile ordering and expanded its Mobile Order & Pay programme to Vancouver in the first quarter of the year. This allows customers to order and pay for their drinks in advance, thereby improving the customer experience through less waiting time. If rolled out in other locations this could positively catalyse Starbucks' profitability and its share price.
With Starbucks trading on a PEG ratio of 1.8, we think that it offers good value for money right now. Sure, its dividend yield of 1.2% may be somewhat low, but with there being positive catalysts such as store expansion (especially in the emerging world), a weakening US dollar, a popular loyalty card programme and the embracing of technology to improve the customer experience, we believe that Starbucks' profit growth will boost dividends and its share price moving forward.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.