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Buy Starbucks (SBUX) Stock for Dividend & Buybacks as China Stores Reopen?

Benjamin Rains

Starbucks SBUX stock jumped 9% on Thursday after executives tried to reassure Wall Street and investors at their annual shareholders meeting Wednesday—which was held virtually—that its operation in China are returning to normal. Plus, SBUX has transitioned to a “to go” model in the U.S. amid the coronavirus, and it said it is committed to buying back more stock.

Coffee & The Coronavirus

Despite Thursday’s jump, the coffee giant’s stock is down big over the last month. In early March, Starbucks said the novel coronavirus reduced its sales projections in China by at least $400 million for the current quarter, with the company forced to close stores throughout much of its second-largest market.

The Seattle-based firm had closed roughly half of its roughly 4,300 stores in China earlier in the year. SBUX noted that it expects Q2 fiscal 2020 comparable store sales to sink 50% in the world’s second-largest economy. But the firm began to reopen stores and recently said that more than 90% of Chinese stores were open again.

The locations are still operating under heightened safety protocols and restrictions. Yet, executives said they expect 95% of its China stores to be open in some form by the end of March.

Meanwhile, in the U.S., the firm has also increased its cleaning measures, rolled out “paid sick leave and catastrophe pay,” and more. Starbucks has also moved to its “to go” model for communities across the U.S. and Canada “for at least two weeks.”

The company hopes to utilize its popular Starbucks mobile app, as well as drive-thru services and its delivery offerings. Plus, the coffee powerhouse announced that “Starbucks Delivers, in partnership with Uber UBER Eats, will reach national U.S. availability by the end of April.”

Rivals like Dunkin' DNKN and McDonald's MCD have made similar moves to remove dine-in options—Nike NKE, Apple AAPL, and other giants have closed their stores.

 

 

 

 

 

Other Fundamentals

The coronavirus continues to spread around the world and in the U.S., causing increased uncertainty. The 11-year bull market ended in the blink of an eye and the Dow, the S&P 500, and the Nasdaq are all down roughly 30% from their mid-February highs.

Shares of Starbucks are down over 30% in the last month, from $89 per share to Thursday’s close of $61.41 a share. Jumping back, SBUX is down around 38% from its 52-week highs and is now trading where it was in the fall of 2018.

The decline has brought SBUX’s valuation to a five-year low. The stock is now trading at 18.1X forward 12-month Zacks earnings estimates, far below its five-year median of 26X, and its high of 36X. Along with its solid valuation, SBUX has committed to buying back more stock.

Starbucks announced on Wednesday that it is set to repurchase up to 40 million shares, which comes on top of its existing authorization. “Starbucks has the financial strength and resilience to manage through this extraordinary time, guided by our Mission and Values,” CEO Kevin Johnson said.

“The increase in our share repurchase program reflects our confidence and optimism about the long-term growth opportunity for our business.”

Starbucks returned a total of $12 billion to shareholders in fiscal 2019 through buybacks and dividends. The firm also raised its quarterly dividend by 14% to $0.41 per share for fiscal 2020.

SBUX’s dividend yield currently rests at 2.68%, which blows away the 10-year U.S. Treasury, Walmart’s WMT 1.81%, and the S&P 500’s 2.33% average—based on SPDR S&P 500 ETF Trust SPY.

Bottom Line

Looking ahead, our Zacks estimates call for SBUX’s fiscal 2020 sales to jump 4.4% and another 9.4% in fiscal 2021 to reach $30.27 billion. Its bottom line is expected to take a hit in Q2, with our estimates calling for a 15% decline in adjusted earnings to $0.51 a share.

Still, Starbucks fiscal 2020 EPS figure is expected to pop nearly 2%, with 2021 projected to soar 17%. The company’s fiscal 2020 earnings revisions activity has been largely negative, but its mixed activity for FY21 helps SBUX earn a Zacks Rank #3 (Hold) at the moment.

Clearly, the coronavirus situation is fluid and things could change rapidly for Starbucks. But it might be time for investors to at least put the coffee giant on their radar.

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