This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Starbucks' Growth Offers Better Brew Than Dividend

NEW YORK ( TheStreet) - A quarter ago, Starbucks (SBUX - Get Report) investors seemed worried the nation's largest coffee brewer was getting a little rich in its valuation.

Now, shares are surging after a fourth quarter earnings beat and dividend hike that may give investors reason to question whether the company has gone from a premium priced consumer stock to a dividend yielder.

So which should investors focus on - Starbucks' valuation multiple or its dividend yield?

The one word answer: Neither.

Heading into 2013, investors should be keying in on the growth strategy that Starbucks chief executive Howard Schultz has spent the better part of a year outlining. While Wednesday's earnings signal the company's U.S. same-store growth prospects and margins are running ahead of Wall Street expectations, Schultz spent a good portion of the company's earnings call talking about 2013 opportunities.

Investors should be listening.

Since Schultz re-took the helm of Starbucks just as the Great Recession hit, he's been able to map out an impressively consistent path toward record margins and profitability, without chasing marginal revenue growth - a strategy that led to his departure from the company roughly a decade ago.

So where does Starbucks see its growth in 2013? The company will continue to try to wrench gains from a consumer goods business that includes K-cups, Via instant coffee packs and packaged coffee, which are infiltrating supermarkets across the U.S. and internationally.

Meanwhile, after acquiring juice-maker Evolution Fresh and bakery chain La Boulangerie in small-priced but highly hyped deals, Starbucks is poised to greatly expand its in-store offerings starting this spring, and will also be using M&A efforts to grow its store count.

Amid a premium-priced valuation that reflects better-than-industry average growth and profitability, and a now bolstered dividend yield to 21 cents a share that may convince investors wary of high multiple stocks to buy into Schultz's vision, Starbucks will have to deliver on growth expectations in 2013, and in a big way.

In fact, after reporting earnings per share of 46 cents that beat Wall Street estimates, a 6% rise on comparable store sales and operating margins that grew at a double digit clip in the fourth quarter that's caused a 10% rise in Starbucks stock, analysts are pinning further share gains on execution in the company's 2013 strategy.

After earnings released after the bell on Wednesday, JPMorgan analyst John Ivankoe points out that the biggest surprise of the earnings report was a beat in U.S. store traffic and told clients in a note released on Thursday that $50 was a good entry point for investors given the company's dividend yield that's now roughly 1.8%.

Ivankoe's biggest point, however, was that upside in the company's stock is likely to hinge on Starbucks new growth efforts. Compared with other 'Buy' rated restaurant giants like McDonalds (MCD - Get Report) and Yum Brands (YUM - Get Report), Starbucks remains JPMorgan's preferred pick in the sector because of its outlook. "YUM has had an exceptional run, MCDhas underperformed significantly but with overstated risk in our opinion, and SBUX now has a favorable combination of still fair valuation and considerable multiyear 20% average earnings growth," writes Ivankoe.

In raising the company's price target from $55 to $56, Deutsche Bank analysts cite a "long runway" for growth, both in the U.S. and internationally.
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
YUM $79.56 0.00%
DNKN $46.50 0.00%
MCD $126.49 0.00%
SBUX $56.23 0.00%
AAPL $93.74 0.00%


Chart of I:DJI
DOW 17,773.64 -57.12 -0.32%
S&P 500 2,065.30 -10.51 -0.51%
NASDAQ 4,775.3580 -29.9330 -0.62%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs