Shares of coffee-giant Starbucks (SBUX -0.41%) are down about 30% from their all-time high, but the stock is still handily beating the market over the past 10 years -- returning 249% compared to the 166% gain for the S&P 500, as of this writing. However, Starbucks is increasingly being viewed as more than just a growth stock. It's also becoming quite the dividend investment.
Starbucks' dividend yield hit an all-time high of 2.75% earlier in 2022. The yield is down about 20% right now from this high because the stock price has recovered. However, Starbucks is still a high-yield investment, and the yield is well above its historical average. Should investors buy Starbucks stock now for the dividend?
A future aristocrat in the making?
Starbucks started paying a dividend back in 2010 and has paid it every quarter ever since. Moreover, when it pays its dividend on Nov. 25, it will complete the company's 12th consecutive year of raising the dividend.
SBUX Dividend data by YCharts
Dividend Aristocrats are stocks that have raised their dividends for at least 25 consecutive years. Therefore, Starbucks is well on its way toward this sought-after status.
During Starbucks' investor-day presentation in September, management said that it expects to give $20 billion to shareholders over the next three years between dividends and share repurchases.
For perspective, over the past three years, Starbucks has paid $6.3 billion in dividends and has used $5.7 billion repurchasing shares -- $12 billion total. Therefore, management's guidance implies a significant 67% increase in the money it's giving back to shareholders.
If Starbucks' management can deliver on these promises, this could be a solid dividend-stock opportunity.
Can Starbucks grow from here?
Dividend stocks like Starbucks can be tricky for investors. Investors are often lured into focusing just on the dividend payouts at the expense of being mindful of the business fundamentals. It's a temptation to be avoided. After all, the business is what allows the company to pay a dividend in the first place.
In Starbucks' case, it aims to pay roughly 50% of its earnings to shareholders as a dividend -- this is called a payout ratio. The problem with this goal is that the company already pays this and more, as the chart below shows. Therefore, if it's going to increase its dividend, it's going to have to grow its earnings.
SBUX EPS Diluted (TTM) data by YCharts
Starbucks just reported financial results for its completed fiscal 2022 on Nov. 3. Disappointingly, its operating margin according to generally accepted accounting principles (GAAP) was down from 16.8% in fiscal 2021 to 14.3%, due to higher expenses like labor and commodities, and due to ongoing lockdowns in China. Because of these headwinds, its GAAP earnings per share (EPS) were down 20% year over year.
Management knows that Starbucks has to perform better than this to be able to return $20 billion to shareholders over the next three years. Management is aiming higher than its lackluster 2022. It plans to grow EPS 15% to 20% annually over the next three years. And that level of growth would certainly support its targeted dividend growth.
Starbucks' EPS growth plan appears ambitious yet achievable. First, it aims to grow profits by growing revenue with new store openings. The company ended fiscal 2022 with 35,711 stores. But it plans to have 45,000 locations by the end of fiscal 2025 and 55,000 by the end of fiscal 2030. Stores are profitable. Therefore, adding new stores will likely grow its profits.
Second, Starbucks is hoping that its business in China will continue recovering. For perspective, there are over 6,000 locations in China alone -- roughly 17% of Starbucks' total worldwide -- highlighting the importance of this market. In fiscal 2022, transactions at Chinese Starbucks fell a whopping 22% year over year due to ongoing pandemic restrictions in the country. If these abate, then sales in China should soar, again adding to the company's bottom line.
Finally, Starbucks' management plans to regain operating leverage through cutting expenses, making operations more efficient, and growing sales. Typically, I'd be somewhat skeptical of a plan like this. After all, if these things were good ideas, then why didn't management start doing them before profits started tumbling?
In Starbucks' case, it's recently made management changes, with longtime CEO Howard Schultz returning to the company on an interim basis. His successor has already been identified as Laxman Narasimhan. In short, this is a new team that was brought in to fix operational problems. That holds more weight for me than if it were the old team making promises.
In conclusion, Starbucks indeed looks like a good dividend stock to buy today. Its yield is high and the payout is growing, supported by a clear path to earnings growth.
