Why I Recently Took Another Sip of Starbucks Stock

The stock market’s blistering run over the past year has made me a much more cautious investor. With the S&P 500 bumping up against its all-time high and many stocks trading at frothy valuations, I’ve been much more selective in buying stocks. Instead, my focus has been on building up my cash position and watch list to capitalize on a future pullback.

However, I’ve still been able to find a few compelling investment opportunities as stocks have marched higher. One of my most recent purchases was a few more shares of Starbucks (SBUX 2.04%). Here’s why I took another sip of the coffee stock.

Caffeinated growth

Starbucks is the largest coffee chain in the world and ended its fiscal 2024 first quarter with 38,587 stores. However, it still has lots of growth ahead.

The company aims to increase its global store count to 55,000 locations by 2030, including 35,000 outside of North America. That’s over 40% growth in its worldwide store count and a nearly 70% increase in locations outside of North America.

Starbucks also aims to increase its same-store sales while expanding margins. It launched its triple-shot reinvention plan last fall to accelerate growth, reduce costs by $3 billion over the next three years, and increase profitability.

The company estimates that these catalysts will drive 5%+ same-store revenue growth and 10%+ overall sales growth over the long term. Meanwhile, margin expansion should help propel 15%+ earnings growth over the long term. That’s a strong growth rate for such a large company.

The valuation isn’t quite as frothy

While the market has been on a caffeinated high over the past year, Starbucks stock has been running on empty. Shares are down more than 8% over the last 12 months, while the S&P 500 has rallied nearly 28%.

That slump has come even though Starbucks is still growing briskly. Earnings were up 20% last year and should rise 15% to 20% in fiscal 2024.

With the stock price falling and earnings rising, Starbucks has gotten a lot cheaper:

SBUX PE Ratio (Forward) data by YCharts.

Its forward P/E ratio of 23.06 is now much closer to the market’s average (the S&P 500’s is currently around 21.2). That’s a reasonable price to pay for such a high-quality company that should grow its earnings faster than the S&P 500.

The company’s falling valuation has led it to ramp up share repurchases. It bought back $1.3 billion in stock during its fiscal 2024 first quarter. That’s more than the $1 billion repurchased during its 2023 fiscal year.

A great dividend-growth track record

Starbucks’ lower valuation has helped push its dividend yield up to 2.4%. That’s significantly higher than the S&P 500’s current yield of 1.4%. It’s also closer to its highest levels over the past decade.

The company is in an excellent position to continue increasing its dividend in the future. It gave investors a 7.5% raise last September. Meanwhile, it has grown its payout at an impressive 20% compound annual rate since initiating a dividend in 2010. While dividend growth has slowed in recent years, Starbucks’ strong long-term growth rate could enable it to reaccelerate its pace.

The potential to deliver satisfying total returns

Starbucks stock has declined over the past year despite delivering brisk earnings growth. Because of that, it trades at a much more attractive valuation these days, especially given the earnings growth it still sees ahead. It also pays an above-average dividend that should continue rising.

These factors position Starbucks to potentially produce total annual returns in the mid-teens, which is a strong return from such a high-quality company. That’s why I recently bought some more shares and plan to buy even more in the future.