While many investors want the stocks they own to increase in price over time, there are also market participants who value the passive income that their investments generate on a consistent basis. Starbucks (NASDAQ:SBUX) might catch the attention of these people.
The world’s largest coffee company has paid a steadily increasing dividend since 2010. The current yield is at a healthy 2.9%. The only problem is that this stock is down 37% from its peak price, which was reached in July 2021.
Is it possible that Starbucks stock will rise again?
A difficult time
The company’s stock performance in recent years may leave you scratching your head. That’s because fiscal 2023 revenue of $36 billion was 24% higher than the coffee chain’s 2021, while operating income rose 21% in that two-year period. Unsurprisingly, the company took a hit during the height of the pandemic, but has since been on a solid recovery path.
However, share prices have been falling over the past fourteen months, falling 16% immediately after the second quarter 2024 financial update (ending March 31). It’s not hard to figure out why.
During the 13-week period, same-store sales fell 3% in the US, the company’s key market. This was caused by a worrying 7% drop in the number of transactions. In the huge Chinese market, the situation is even worse, as same-store sales fell by 11%. CEO Laxman Narasimhan called this a “challenging operating environment” as consumers become more selective with their spending.
Making investors even more frightened was management lowering expectations for the 2024 fiscal year. It now expects sales to rise by low single digits, compared to a previous range of 7% to 10%.
Favorable qualities
It’s not encouraging for shareholders to see Starbucks in this state. But for long-term investors, it’s important to stay focused on the company’s positive attributes, of which there are many.
For starters, Starbucks has a wide economic moat, which stems from its brand powerthat protects its competitive position. There is something about Starbucks that sets it apart and allows it to resonate with consumers. It is difficult to quantify the status of a brand. But I think the fact that the company has generally been able to grow same-store sales through higher prices and foot traffic over longer periods shows that it has something special.
Plus, it helps that the average Starbucks price gross profit margin over the past ten years, for example, this is a fantastic 28.2%. This may be overlooked, but Starbucks is a consistently profitable and financially healthy company. Persistent positive earnings and free cash flow are exactly what help the company fund its dividend payments.
And the expansion doesn’t stop there. As of March 31, there were nearly 39,000 Starbucks locations around the world. That’s a ridiculously large number. But management believes there’s still room for significant growth. By 2030, the goal is to open as many as 55,000 locations, and by then, revenues and profits will be much higher than they are now.
Low market expectations
Investors are clearly disappointed with Starbucks, with shares taking a hit because of uncertainty about when things will start to improve.
But this pessimism creates a buying opportunity for those who can see out over the next three to five years. Starbucks currently trades at a price-to-sales ratio of less than 2.5. Shares have rarely been cheaper in the past decade.
To be clear, I’m not entirely certain that the stock will skyrocket. However, based on the positive attributes of the company, I’m optimistic that this investment will pay off for buyers.
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Starbucks. The Motley Fool has a disclosure policy.
This Dividend Stock Is Down 37%: Is It Ready to Skyrocket? was originally published by The Motley Fool
