Seattle-based coffee chain Starbucks Corporation (NASDAQ:SBUX) has seen its share price fall nearly 15% so far this year and roughly 20% from its 2015 peak amid market uncertainty and worries about Starbucks’ growth prospects. But those losses did do one positive thing — they created a value proposition in Starbucks stock.
And now that the company has released some promising fiscal fourth-quarter numbers, now looks like an excellent time to get bullish on SBUX once again.
Here’s why.
Brand Strength
Perhaps the biggest reason to add Starbucks stock to your portfolio is the company’s stronghold on the industry. The firm has a market cap of $78 billion. To put that into perspective, the next most comparable chain — Dunkin Brands Group Inc (NASDAQ:DNKN) — is just $4.7 billion by market capitalization.
The Starbucks name has become synonymous with good coffee — or really, any coffee. It has been named as the sixth fastest-growing brand in the world by Interbrand.
SBUX isn’t going anywhere anytime soon on that front.
Why the Dip?
Starbucks stock, thanks to the company’s increasingly global brand, has been weighed down by a number of macroeconomic factors, among others.
Starbucks, like most international-heavy fast-food companies, felt the sting both economic uncertainty, which caused consumers to tighten their pursestrings, as well as currency fluctuations that crimped the company’s sales on a U.S. dollar-denominated basis.
That said, SBUX also has dealt with slowing same-store sales in North America this year, which caused investors to question whether the chain could continue its clip of rapid growth.
Part of the reason for those disappointing comps was an unpopular change to Starbucks’ loyalty program. CEO Howard Schultz blamed some hiccups in the rollout of the new program for the poor figures.
But good news there: The firm’s fourth-quarter earnings showed a strong finish to the year, with global comps up 5%, and comps in the Americas up 6%.
Starbucks Still Has Growth Potential
For a company that supposedly has a location on every street corner in America, SBUX still has been able to grow at a robust pace.
That’s thanks to initiatives such as tasting experiments at its Reserve Roastery locations, as well as the rollout of evening menus and alcoholic beverages at locations across the country.
The most exciting growth story for Starbucks is in Asia. The popularity of the Starbucks brand has been spreading quickly in China, where the firm’s comparable-store sales grew 6% in the fourth quarter. So far, Starbucks has been able to add 2,000 new stores in China over the past five years. It plans to add an additional 2,600 by 2021.
Profitability on the Rise
Another encouraging sign from the fourth-quarter report was improving profitability. Operating margins in Q4 were 21.5%, up from Q3’s 19.7%.
That’s good news for anyone interested in the company’s ability to maintain and raise its dividend, which, by the way … it did.
Starbucks stock offers a modest dividend of 20 cents per share, good for a 1.5% yield. SBUX hasn’t just become a high yielder, but the company did say it would push its quarterly offering 25% higher to 25 cents per share, which would bump the yield up to around 1.9% based on current prices.
The increase isn’t atypical, either; the dividend on SBUX stock has been boosted by about 20% annually on average since it started paying out in 2010. Meanwhile, Starbucks still is paying out less than half of its income in dividends, so future increases seem plenty likely.
Bottom Line on Starbucks Stock
The macroeconomic and comps woes that held SBUX back this year have created an opportunity, and Starbucks finally gave investors a quick, knowing wink.
In addition to what was mentioned above, SBUX produced a huge increase in earnings, to 54 cents per share from 43 cents in the year-ago period. That figure, as well as its $5.71 billion in revenues, were just enough to get past analysts’ expectations.
Starbucks stock looks like a bargain anywhere under $56. The time is now.
As of this writing, Laura Hoy was long SBUX.
