More than ever, the market needs a reason to believe in this company.
Starbucks (SBUX -0.07%) is in front of its official fiscal 2024 fourth-quarter earnings release, and those numbers aren’t going to look good. After all, the world received a big sneak preview last week with the coffee slinger’s preliminary release of some key figures for the period. For the most part, they were concerning at best and frightening at worst.
With new leadership pledging to return Starbucks to its roots as a cozy neighborhood coffee shop chain, it’s also spending some coin to keep investors sweet on the company. To do this, it’s parting with around $181 million on one particular shareholder-pleasing effort. Let’s unpack this move, and see whether that decision affects the buy or sell case for its stock.
Sweetening the sour coffee
That $181 million figure is the extra funding Starbucks will need to pay its upcoming set of dividends. The company just declared a dividend raise, with the quarterly shareholder payout being enhanced from $0.57 per share to $0.61. With around 1.13 billion shares outstanding, the new amount will add $181 million to its annual expenses.
To some degree, this is a necessary cost for the coffee king. With the new dividend raise it has now increased the payout annually for 14 years running, at a rate (7%) that’s basically in line with previous bumps. Keeping the raise train on track is a signal from management to shareholders that the company’s business is moving along nicely, thanks.
Yet Starbucks, notoriously, isn’t doing that great. That preliminary earnings release warned us that it’s going to report weak fiscal fourth-quarter results on Wednesday, Oct. 30. Among the more sour items was the 7% year-over-year fall in same-store sales (an ever-important yardstick for restaurant and cafe chains), fueled by declines in its major markets, the U.S. (down 6%) and China (14%).
This negatively affected key fundamentals. Revenue slumped by 3%, while non-GAAP (adjusted) net profit per share fell by 24%. The latter would be a worrying figure for any company; with its massive footprint and ubiquitous presence in certain markets, such a drop is especially concerning with this one.
New lease on life
It’s safe to say that more than a few Starbucks investors are staying in the game because of the presence of (relatively) new CEO Brian Niccol. He’s justifiably admired for the magic he worked as CEO of pace-setting restaurant chain operator Chipotle Mexican Grill. Since Starbucks shares numerous characteristics with the burrito bistro, he’s a good choice for an executive to get the company back on its feet.
So far he’s done well making the right pronouncements, pledging to return Starbucks to its roots as a welcoming neighborhood coffee option with exceptionally good service. Cleverly, Niccol avoided diving into specifics. His desire for “getting back to Starbucks” — presumably the days when its fundamentals and share price were reliably climbing — could shake out in many different kinds of changes and modifications.
What we’re looking at, then, is a large and stumbling giant that hasn’t (at least publicly) mapped out a cogent strategy for recapturing growth. That makes its dividend more important than it was previously; more than ever these days, management needs compelling reasons for people to buy and hold on to its stock.
As it stands now, the payout is rather generous for its industry. The dividend raise pushes it to where it would yield 2.5% on the most recent closing stock price.
Although that’s nearly double the percentage rate of the S&P 500 index’s average yield, there are higher ones elsewhere in the food and beverage sphere. For instance, multinational snacks giant Mondelez pays out at 2.7% these days, and snacks and drinks giant PepsiCo tips the scales at 3.2%.
To raise higher or not raise higher, that is the question
Given this, one investor-pleasing move Starbucks could make is to declare one (or several) more substantial dividend raises in the near future. Yet spending millions of dollars to essentially buy enhanced yield hardly guarantees extra love from the market.
Besides, the company’s cash dividend payout ratio is already relatively high, holding steady in recent times at a shade under 67% on an annual basis. With such a large and wide network of company-owned stores, management is probably better off deploying precious capital to those outlets.
Finally, Starbucks doesn’t really have the reputation of being a dividend stock. For much of its history, investors have piled into it on the promise of fundamental growth, and that’s what many are thirsty to see in the future.
Taking all of the above into consideration, I’d say that unless Starbucks starts cranking its dividend notably higher, the payout won’t be much of a factor in how people feel about the stock. These days the company is a turnaround story, and it’s how that story is presented, planned, and ultimately executed that will affect the sentiment on its shares.
Eric Volkman has no position in any of the stocks mentioned. 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.
