Starbucks Corp. (NASDAQ:SBUX) declared its quarterly dividend on Tuesday, raising its payout to 57 cents per share from a previous 54 cents per share.
The company's dividend raise and robust third-quarter earnings results suggest potential tailwinds might be in store. However, a deeper analysis is required to establish the feasibility of investing in the stock at $95 per share.
Let's traverse into a more detailed discussion about Starbucks Corp's (NASDAQ:SBUX) dividend increase and quantify whether value exists.
Latest earnings and subsequent dividend increase
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Starbucks Corp's (NASDAQ:SBUX) latest dividend increase amounts to a 7.5% quarter-on-quarter increase, which presents little surprise as the company's compound annual dividend growth rate for the past 14 years amounts to 20%. However, it should be considered that companies often determine their dividend policies based on their expected financial performance; as such, Starbucks Corp's (NASDAQ:SBUX) latest dividend increase suggests its board believes the firm's prospective operating results will be robust.
Trivially speaking, in order to pay sustainable dividends, a company must generate sufficient profits, and Starbucks Corp's (NASDAQ:SBUX) third-quarter financial results convey just that.
Record Revenues and Profit Margins
According to its latest results, Starbucks Corp (NASDAQ:SBUX) achieved record revenues amounting to $9.2 billion, which is a 12% year-on-year increase. Much of the company's fundamental support derived from its international markets segment, as its same-store sales surged by 24%. Additionally, Starbucks Corp (NASDAQ:SBUX) achieved a quarterly operating profit margin of 17.4%, trumping the 16.9% it produced in the prior year.
Source: Starbucks Corp (NASDAQ:SBUX) (third-quarter results)
Concerns about Performance in China
Although the company's firm-wide performance is superb, many are worried about its lagging performance in China. In fact, Andrew Charles of Cowen recently opined on the matter, stating: "While we forecast consensus 2023-25E EPS is achievable, in our view the multiple isn't discounted enough vs the 5Y avg that leads us to expect shares will be in a holding pattern,"
In my view, investors are overzealous regarding headwinds from China. Sure, political issues coupled with interim economic stagnation are not beneficial to Starbucks Corp (NASDAQ:SBUX). However, exposure to China is part of a long-term growth strategy with secular growth central to most companies' rationale; moreover, unstable political issues within the region are part and parcel of expanding into an emerging market.
To summarize this sub-section, it can be reasonably stated that Starbucks Corp's (NASDAQ:SBUX) fundamental attributes remain robust, acting against the grain of the economic headwinds embedded within 2023's economy. Moreover, another dividend increase frames the possibility of continued financial outperformance.
Other noteworthy events
In other events, Starbucks Corp's (NASDAQ:SBUX) visionary Howard Schultz has decided to step down from Starbucks Corp's (NASDAQ:SBUX) board after retiring as Chief Executive Officer merely six months ago. Although Schultz will continue to serve as Chairman Emeritus, it is clear that Starbucks Corp (NASDAQ:SBUX) is in a succession process.
Schultz's Departure and Succession Process
Schultz's outgoing statement read as follows.
"As I reflect on my 41 years with the company, a foundation of love and creative, passionate customer experience has been built by over five million partners (employees) around the world who have worked in the company,"
Even though many might be concerned by Schultz's departure, it must be weighed in that Starbucks Corp's (NASDAQ:SBUX) corporate strategy will unlikely change. Additionally, the company's dynamics have shifted significantly as the firm has traversed from a growth entity to a mega company.
As such, I do not expect the succession to yield noteworthy material changes to the firm.
As for Starbucks Corp's (NASDAQ:SBUX) valuation, a discounted cash flow model implies the stock is undervalued by approximately 7.16%.
At face value, Starbucks Corp's (NASDAQ:SBUX) cash flow-based valuation is slightly underwhelming; additionally, Starbucks Corp (NASDAQ:SBUX) is trading at 29 times its earnings, which is significantly higher than its average price-to-earnings ratio of 15.82. Therefore, I fail to conclude that Starbucks Corp (NASDAQ:SBUX) presents value at this time.
Further to its valuation, Starbucks Corp's (NASDAQ:SBUX) 2023 guru trades remain in net negative territory, with the likes of Joel Greenblatt (Trades, Portfolio), Steve Cohen, and Jeffries Group selling Starbucks Corp (NASDAQ:SBUX) shares in recent months.
While guru trades do not determine a stock's trajectory by themselves, seeing the bearish outlook on Starbucks Corp (NASDAQ:SBUX) by some of the world's finest investors is worrisome.
Starbucks Corp's (NASDAQ:SBUX) latest dividend increase presents an interesting talking point as the hike juxtaposes negative sentiment surrounding the firm's exposure to China, among other aspects.
My analysis shows that Starbucks Corp (NASDAQ:SBUX) has produced non-cyclical results in 2023, trumping estimates as few anticipated the firm to uphold its secular growth pattern during a soft consumer environment. Moreover, the company's latest data implies that the bearish outlook on China might be slightly overplayed.
However, despite Starbucks Corp's (NASDAQ:SBUX) robust financial results and its compelling dividend, its stock presents little value at this time, which is corroborated by various valuation metrics and recent guru trading activity.
This article first appeared on GuruFocus.