Is Starbucks still a bargain after an impressive 5-year rally?

In a persistently low interest rate environment, income investors have few opportunities to achieve a decent return. Savings accounts pay almost zero, while the yield on government bonds is extremely low.

A strategy that worked in 2019 was to invest in high-quality dividend shares that were positioned to offer both capital gains and a growing payout. Popular coffee chain company Starbucks (NASDAQ 🙂 was one of the biggest winners in this group: it remained a favorite choice for analysts who predicted that his profit momentum would generate more profit.

The impressive five-year rally for the seller of Frappuccinos and pumpkin-spiced lattes makes it a bit more complicated for investors trying to decide whether it is still worth investing in this dividend.

Weekly price chart of Starbucks

Shares from the specialty coffee supplier are struggling to reach a new high after a record peak in July. In fact, they have fallen by more than 10% in the last six months. They closed Friday for $ 86.42.

The recent bearish spell began when Starbucks said on January 28 that it was temporarily closing more than half of its stores in China due to the corona virus outbreak. These closures in its second largest market, where it has 4,292 stores, will make it difficult for the Seattle-based company to achieve its continued growth of 10% in earnings per share.

An activist investor leaves

Another development, perceived by some investors as a sign that the good times are over, came when activist investor Bill Ackman left his major position in Starbucks after seeing a return of more than 70% in 19 months .

The founder and CEO of the billionaire of Pershing Square Capital Management told the shareholders last week that the future return of the chain "could be more modest".

Starbucks "should, according to the presentation, continue to generate robust earnings growth through one of the most dominant, attractive and profitable brands in the world." Starbuck's US sales in the same stores exceeded expectations, with an average growth of 5% over the course of the Pershing Square investment.

In addition to these temporary setbacks, there is little to suggest that this fantastic consumer growth story is losing its appeal to income investors whose goal is to earn steadily growing dividends. Last month, the company reported a strong fiscal first quarter in 2020 that exceeded analyst estimates. In North America, Starbucks continues to grow thanks to its technology-driven innovation, customer reward initiatives and improved store formats. Comparable sales increased 6% in the US and 3% in China during the period.

As far as the strategy is concerned, Starbucks remains well on track as the chain of coffee drinkers recovers not only in its home markets, but also in China – a country that has played a central role in its growth strategy. The Starbucks loyalty program grew to 18.9 million active members in the US, an increase of 16% on an annual basis during the first quarter.

With that growth, the growing dividend from Starbucks is another major attraction for investors looking for income. One rarely finds a dividend share that yields less than 2% that offers such impressive dividend growth. The payment to Starbucks shareholders is currently $ 1.64 per year, with a return of 1.9%.

During the past five years, Starbucks has achieved an average dividend growth of around 23% per share and with a payout ratio of around 50%, the rate of cash return does not seem to be slowing down rapidly. The stock is traded at 29 times the expected profit, with an estimated long-term profit growth of 12-15%.

Bottom Line

We see no major decline in the shares of Starbucks in 2020, with the company's core goals well on schedule. At the same time, we do not see a repeat of the 2019 performance, especially when the Chinese economy is at high risk of a coronavirus slowdown.

That said, Starbucks remains an attractive buy-and-hold candidate for income investors, especially with its strong dividend growth. The current fall in stock value offers a good entry point.

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