The Q1 earnings season is nearly over, and we certainly have some interesting data points to consider. While the percentage of companies reporting positive earnings surprises is slightly higher than historical averages, markets’ reaction to earnings has been quite nuanced.
In its report, FactSet noted, “To date, the market is rewarding positive earnings surprises reported by S&P 500 companies slightly less than average while punishing negative earnings surprises reported by S&P 500 companies more than average.”
One of the names that crashed after reporting earnings was Starbucks (SBUX), which suffered one of its worst post-earnings declines ever after it missed expectations on both the top line and bottom line. Wall Street analysts also turned bearish on the stock after the dismal report, and slashed their ratings and target prices.
Meanwhile, Starbucks offers a healthy dividend yield of nearly 3%, which is over twice what the average S&P 500 Index ($SPX) stock pays.
Starbucks Pays a Healthy Dividend Yield
Starbucks is not a dividend aristocrat just yet. The company has increased its dividend every year since 2010, when it started paying one – but it has yet to do so for 25 years, which is the benchmark for becoming a dividend aristocrat. However, the stock looks on track to do so, given management’s commitment to dividends.
Notably, dividends feature prominently during Starbucks’ earnings calls, and during the fiscal Q2 2024 earnings call, the company said that its commitment to shareholders is reflected in its “best-in-class dividends.”
During the fiscal Q4 2023 earnings call last year, Starbucks reiterated its commitment to the targeted 50% payout ratio, and highlighted that its annual dividends have risen at a CAGR of 20% since it started paying them.
When it comes to price action, though, Starbucks stock has been a long-term underperformer. The shares are trading flat over the last five years, even as the broader markets have delivered stellar returns over the same period. Is SBUX stock a buy for its dividend yield? We’ll discuss in this article, beginning with its recent financial performance.
SBUX Stock Crashed After Q2 Earnings
Starbucks reported revenues of $8.6 billion in its fiscal Q2 2024, which ended on March 31. Revenues were down 2% YoY, and fell well short of the $9.13 billion that analysts were expecting. Starbucks blamed a “complex operating environment" for its dismal top-line performance.
Same-store sales – a key operating metric that helps gauge the performance of existing stores – fell 4%, led by a 6% fall in traffic. The company reported a decline in same-store sales across all regions, including in North America, where sales were weak in the previous quarter, as well.
During the earnings call, Starbucks CEO Laxman Narasimhan said, “many customers are being more exacting about where and how they choose to spend their money, particularly with stimulus savings mostly spent.”
In his prepared remarks, though, he said, “This quarter's results do not reflect the power of our brand, our capabilities or the opportunities ahead.”
After a tough fiscal Q2, Starbucks lowered its full-year guidance and forecast revenue growth in the low single digits, down from its previous forecast of 7% to 10% growth. The company also lowered its guidance for same-store growth, while trimming the earnings per share outlook to guide for flat to low single-digit growth – a steep markdown from the 15%-20% growth that it previously forecast.
SBUX cratered more than 15% in one session on the earnings report, marking its worst daily performance in years.
Starbucks Stock Forecast
As expected, analysts’ sentiments towards SBUX soured after the earnings, and at least two brokerages – Deutsche Bank and William Blair - downgraded the stock. Only 42% of analysts covering Starbucks rate it as a “Strong Buy” or “Moderate Buy,” while the corresponding percentage a month ago was almost 48%. The stock's median target price of $92.69 is 22.6% higher than current prices.
Should You Buy Starbucks Stock for Its 3% Dividend Yield?
Starbucks is among the most iconic consumer-facing brands, but the company is currently going through turmoil - both on a macro and company-specific level. It has reached near saturation in North America, while China - which was expected to spur its growth - has slowed down structurally. The trouble that American brands have been facing in the world’s second-largest economy is not helping matters, either. Starbucks has also faced boycott calls over what it said are “misperceptions” over its stance on the Israel-Hamas conflict.
That said, after its recent underperformance, SBUX stock trades at a next 12-month price-to-earnings (PE) multiple of just over 20x - which, for context, is the lowest since March 2020, when global markets fell amid the COVID-19 scare.
The current multiples are just marginally higher than the March 2020 bottom. I believe that while things don’t look too rosy for Starbucks in the near term, they are not bad enough to justify such a drastic valuation discount to long-term averages. In terms of dividends, the current yield is the highest ever, driven by both growing dividends and, more importantly, the steep fall in its stock price.
Overall, I believe that while the macro environment continues to be challenging for Starbucks in the near term, and the stock might still fall somewhat from these levels, the current crash looks like an opportunity, especially for investors looking to invest in a future dividend aristocrat at a discount.
On the date of publication, Mohit Oberoi did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
