While many investors want the price of the stocks they own to skyrocket over time, some market participants value the passive income their holdings consistently generate. Starbucks (NASDAQ:SBUX) might attract the attention of these people.
The world’s largest coffee company has been paying a steadily increasing dividend since 2010. yield The stock sits at a healthy 2.9%. The only problem is that this stock is down 37% from its all-time high price, reached in July 2021.
Could Starbucks stock be ready to soar again?
Going through a difficult time
The company’s stock performance over the past few years might leave you perplexed. Indeed, revenue of $36 billion for fiscal 2023 was 24% higher than that generated by the coffee chain in 2021, with operating profit up 21% over that two-year period. years. Unsurprisingly, the company was hit at the height of the pandemic, but has since been on the path to a strong recovery.
However, shares have seen a decline over the past 14 months, and they immediately fell 16% after the Q2 2024 financial update (ended March 31). It’s not difficult to understand why.
During the 13-week period, same-store sales declined 3% in the U.S., the company’s largest market. That was driven by a troubling 7% drop in transactions. In the huge Chinese market, the situation was even worse, with same-store sales down 11%. CEO Laxman Narasimhan called it a “challenging operating environment” as consumers became more selective in their spending.
Investors were further spooked by management lowering its guidance for fiscal 2024. It now expects revenue to rise by only single digits, down from a previous range of 7% to 10%.
Favorable qualities
It’s not encouraging for shareholders to see Starbucks in this state. But for long-term investors, it’s important to stay focused on the company’s favorable qualities, of which there are many.
To begin with, Starbucks has a wide economic moat, which stems from its brand strengthwhich protects its competitive position. There is something about Starbucks that has differentiated it and allowed it to resonate with consumers. It is difficult to quantify the status of a brand. But I think the fact that the company has generally managed to increase sales in the same stores through higher prices and increased footfall over long periods of time demonstrates that it has something special.
Plus, it helps that the average Starbucks Gross margin over the last 10 years, for example, it’s a stunning 28.2%. It might go unnoticed, but Starbucks is a consistently profitable and financially healthy company. Continued positive profits and free cash flow are precisely what helps the company fund its dividend payments.
And the expansion is not over. As of March 31, there were nearly 39,000 Starbucks locations located around the world. That’s a ridiculously high number. However, management believes there is still considerable room for growth. By 2030, the goal is to have 55,000 points of sale open, which will significantly increase sales and profits.
Low market expectations
Investors have clearly lost their confidence in Starbucks. Stocks have taken a hit as there is uncertainty over when the situation will start to improve.
But this pessimism creates a buying opportunity for those who can look ahead three to five years. Starbucks is currently trading at a price-to-sales ratio of less than 2.5. Shares have been almost as cheap as they have been in the past decade.
To be clear, I’m not entirely sure the stock will skyrocket. However, given the company’s positive qualities, I’m optimistic that this investment will play out well for buyers.
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Neil Patel and its clients have no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Starbucks. The Motley Fool has a disclosure policy.
This Dividend Stock Is Down 37%: Is It Ready to Skyrocket? was originally published by The Motley Fool
