Starbucks (NASDAQ:SBUX) Shares fell after the beverage giant blew its fourth-quarter and full-year 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.
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Record turnover
Starbucks’ earnings highlight was record quarterly sales of $9.37 billion and record annual sales of $35.98 billion.
In the fourth quarter, Starbucks increased revenue by 8% thanks to both higher sales volume and a higher average amount per transaction. Ideally, investors want to see revenue growth through pricing power and higher volumes, not just one or the other. Starbucks’ revenue composition is especially impressive when you consider that many companies rely solely on price increases to fuel growth.
Despite the stock’s rise of 165.5% over the past decade, its price-to-sales (P/S) ratio is even lower today than it was a decade ago – illustrating the strength of the company’s revenue growth.
SBUX data by YCharts
P/S is not everything. In fact, the price-to-earnings (P/E) ratio is arguably a much more valuable metric for a company like Starbucks. Rather, the price-to-earnings ratio of 3.33 is meant to show that Starbucks stock, while higher today than in recent years, is cheaper compared to its historical price-to-earnings average.
Drive profitability
It wasn’t just sales that were high. Starbucks’ price increases and operational improvements led to higher margins. Overall, non-GAAP (adjusted) operating margin was 16.1%. But U.S. operating margin was 23.2%, compared to 18.6% in the fourth quarter of fiscal 2022. International operating margin was 15.2%, up 300 basis points from the fourth quarter of fiscal 2022.
Sales growth is one thing. But that is always possible with discounts and promotions. What Starbucks does – increasing sales combined with margin expansion – is much more difficult.
For example, comparable store sales in North America increased 9% in fiscal 2023, with 6% of that coming from higher average ticket amounts and 3% from higher transaction volumes. In other words: Starbucks ensures that people spend more per transaction and go to Starbucks more often.
Starbucks is making the right moves
A major reason for Starbucks’ outsized success is menu improvements, both in food and beverage. Starbucks has had a lot of success with its seasonal promotions, especially its fall drinks. But it is also highly dependent on the supply of iced drinks during the warmer months.
Starbucks’ ability to respond to customer needs, regardless of the season, was clearly visible in the past quarter. The fourth quarter of the company’s fiscal year includes July, August and September. While many consider the holidays to be the best time for Starbucks, in reality it is the summer and early fall periods that typically produce the highest quarterly sales of the year.
The Pumpkin Spice Latte, Starbucks’ most popular seasonal drink, will be released at the end of August. And Starbucks relies heavily on sales of iced drinks and benefits from people being on the go and traveling in the summer.
Another factor contributing to Starbucks’ profitability is that the company has built its business around the Starbucks app, mobile ordering and payment, and the Starbucks Rewards program.
Mobile ordering and payment encourages drink customization and allows customers to easily pick up their drink through the drive-thru or in-store. Meanwhile, Starbucks Rewards offers basic incentives for going to Starbucks, plus bonuses for ordering items within a certain time, holiday features and more. In short, it is a way to improve the customer experience. And it has proven hugely successful in getting customers to visit Starbucks more often and spend more per order.
An undervalued dividend stock
Starbucks has quietly become one of the most reliable dividend stocks on the market. It does not have the highest return. But it has increased its dividend every year since 2010. And the increases have been significant too, including doubling dividends over the past six years.
Unlike some companies that rely primarily on buybacks and dividends to increase shareholder value, Starbucks still actively invests in its business. For example, its international store count just passed 20,000, giving the company a total of 38,038 stores. Starbucks ended the year with 6,806 stores in China, compared to 6,021 at the end of fiscal 2022. However, Starbucks plans to add approximately 1,000 new stores in China each year to reach its goal of 9,000 stores in China by the end of 2025.
Starbucks is not growing as fast as in the early days. But it is still investing heavily in its growth. And for that reason, the dividend should be seen as the icing on the cake of a solid underlying investment thesis. In other words, Starbucks stock is worth owning for the reasons discussed. The growing dividend with a 2.2% yield gives investors another reason to hold the stock during periods of volatility.
Starbucks stock is worth a look
Starbucks may have gone big lately. But over the past six months, rates have still fallen, down less than 5% year to date and up less than 15% over the past three years. Considering how much the business has improved and the growth initiatives Starbucks has put in place, the stock has plenty of room to go further from here.
Starbucks’ price-to-earnings ratio of 29.1 isn’t cheap. But if it can continue to grow its revenue and earnings by 10% or more per year and meaningfully increase its dividend, then the valuation is justified.
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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in Starbucks. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.