Starbucks (NASDAQ: SBUX) stock has been on a tear after the beverage behemoth blew its fourth-quarter and full-year fiscal 2023 results out of the water.
Let’s discuss why the company is giving investors everything they could have hoped for and why the dividend stock is worth buying now.
Image source: Getty Images.
The standout from Starbucks’ earnings was record quarterly revenue of $9.37 billion and record fiscal-year revenue of $35.98 billion.
In Q4, Starbucks increased sales by 8% due to both higher sales volume and a higher average amount per transaction. Ideally, investors want to see sales growth due to pricing power and higher volumes, not just one or the other. The composition of Starbucks’ sales is especially impressive considering a lot of companies rely solely on price increases to drive growth.
Despite the stock being up 165.5% over the last decade, its price-to-sales (P/S) ratio is actually lower today than it was 10 years ago — which illustrates the power of the company’s sales growth.
P/S isn’t everything. In fact, price-to-earnings (P/E) is arguably a much more valuable metric for a company like Starbucks. Rather, the 3.33 P/S ratio is meant to show that Starbucks stock, although higher today than in past years, is less expensive compared to its historical P/S average.
It wasn’t just sales that came in high. Starbucks’ price increases and operational improvements led to higher margins. Overall, its non-GAAP (adjusted) operating margin was 16.1%. But the U.S. operating margin was 23.2% compared to 18.6% in Q4 of fiscal 2022. The international operating margin was 15.2%, 300 basis points higher than Q4 fiscal 2022.
Sales growth is one thing. But that can always be achieved with discounts and promotions. What Starbucks is doing — higher sales paired with margin expansion — is much more difficult.
For example, North American comparable-store sales increased by 9% in fiscal 2023, 6% of which came from higher average ticket amounts and 3% from a higher number of transactions. In other words, Starbucks is getting folks to spend more per transaction and go to Starbucks more often.
A big reason for Starbucks’ outsized success is menu improvements, on both the food and beverage front. Starbucks has had a great deal of success with its seasonal promotions — most notably its fall drinks. But it also relies heavily on iced drink offerings during the hotter months.
Starbucks’ ability to tap into customer cravings no matter the season was put on display in its recent quarter. The fourth quarter of the company’s fiscal year includes July, August, and September. While many think of the holiday season as being prime time for Starbucks, it’s really the summer and early fall time frame that usually features the highest quarterly revenue of the year.
The pumpkin spice latte, Starbucks’ most popular seasonal drink, is released in late August. And Starbucks relies heavily on iced drink sales and benefits from folks being out and about and traveling during the summer.
Another contributing factor to Starbucks’ profitability is that it has built its business around the Starbucks app, mobile order and pay, and the Starbucks Rewards program.
Mobile order and pay encourages drink customization and allows customers to simply go through the drive-thru or in store to pick up their drink. Meanwhile, Starbucks Rewards provides base incentives for going to Starbucks, plus bonuses for ordering items in a certain amount of time, holiday features, and more. In short, it is a way to improve the customer experience. And it has been wildly successful at getting customers to go to Starbucks more often and spend more per order.
Starbucks has quietly become one of the most reliable dividend stocks on the market. It doesn’t have the highest yield. But it has raised its dividend every year since 2010. And the raises have been sizable, too, including the dividend doubling over the last six years.
Unlike some companies that rely mainly on buybacks and dividends to fuel shareholder value, Starbucks is still actively investing in its business. For example, its international store count just passed 20,000, giving the company 38,038 stores in total. Starbucks finished the year with 6,806 stores in China compared to 6,021 at the end of fiscal 2022. However, Starbucks plans to add around 1,000 new stores every year in China in order to reach its goal of 9,000 stores in China by the end of 2025.
Starbucks isn’t growing as quickly as it did in its early days. But it is still investing heavily in its growth. And for that reason, the dividend should be seen as a cherry on top of a solid underlying investment thesis. Put another way, Starbucks stock is worth owning for the reasons discussed. Its growing dividend with a 2.2% yield just gives investors one more reason to hold the stock through periods of volatility.
Starbucks may be up big recently. But it is still down over the last six months, up less than 5% year to date, and up less than 15% over the last three years. Given how much the business has improved, and the growth initiatives Starbucks has in place, the stock has plenty of room to run from here.
Starbucks’ price to earnings ratio of 29.1 isn’t cheap. But if it can keep growing its top and bottom line at 10% or more per year and make meaningful dividend raises, then the valuation is justified.
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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Starbucks. The Motley Fool has a disclosure policy.
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