Why Starbucks Can Grow Its Dividend for a Decade

Again, Wednesday’s news is probably noise in the grand scheme of things. Starbucks has a $90 billion market cap. Its 2014 global revenue was $16.5 billion, and it generated $3.1 billion in operating income and almost $2.1 billion in net income. Here is more detail on why Starbucks has a dividend that is not just safe, but why it can grow that dividend for the next decade.

Starbucks is still considered a growth company. Its dividend history dates back only to 2010, and that initial five cent dividend has now risen to $0.16 and is due to be hiked again soon. The current $0.64 annualized dividend payment compares to operating earnings of $1.33 per share a year ago. It also compares to a 2015 expected $1.59 per share, as well as $1.88 per share for 2016.

Many investors may feel that a price-to-earnings (P/E) ratio of 38 is keeping a lid on how high its dividend can be. What those investors have to consider is double-digit revenue and earnings growth. Starbucks also has been very selective in how it handles mergers and acquisitions, despite having a serious global growth story ahead.

The coffee retail giant has a dividend yield of only about 1% today, but its 40% payout ratio has room to grow on its own, and with the expected earnings growth ahead.

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Note that investors should not expect massive dividend hikes. As that P/E ratio contracts, assuming it does, then the dividend can move higher. Ask yourself this: who doesn’t expect Starbucks to keep growing here and abroad?

As a reminder, here are a handful of Starbucks’ own long-term targets, issued by the company itself at the end of 2014:

• for revenues to approach $30 billion in Fiscal Year 2019 versus $16 billion in Fiscal Year 2014 … grow its revenue by 60%, nearly double its operating income, and more than double its ready-to-drink (RTD) business outside of the U.S.
• identifying high-value opportunities in China (doubling to 3,000 stores there), India, Japan and Brazil;
• and reinventing the $109 billion global tea category.

Shares of Starbucks were last seen trading right at $60.60, with a consensus analyst price target of $64.13. That analyst target keeps ratcheting higher as well. The stock has a 52-week trading range of $36.71 to $60.89.

A final reminder: a realized dividend yield is based on each investor’s own cost-basis rather than on the share price change each day. Those investors who bought Starbucks shares when it started paying a dividend back in 2010 got to buy the shares at a split-adjusted price of under $12.00. Those investors are up 400% now — and their dividend yield has now risen to 5%.

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