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Starbucks' Growth Offers Better Brew Than Dividend

Where does CEO Schultz see the company's growth? He spent the company's fourth quarter earning call talking about packaged products and profit margins, which likely pleased analysts.

Schultz also spent a significant portion of the call talking about Evolution Fresh and La Boulange, two acquisitions that initially raised investor eyebrows. In 2013, both acquisitions will, "expand our retail store and channel development presence," said Schultz on the call, as Starbucks rolls out new stores.

Earlier in 2012, TheStreet noted that Schultz's plan with both bolt-on acquisitions will require a far higher amount of spending than either company's price-tag, in an M&A strategy that resembles IBM in its style and planning.

Like IBM (IBM), we argued Schultz is of the belief he's found a way to grow Starbucks in a way that increases the already high penetration and margins of the company. It's an M&A strategy that hinges on using revenue synergies so $1 in acquisition spending doesn't just mean $1 in new revenue or profit.

Because Evolution Fresh and La Boulange will create non-Starbucks branded store growth for the company and their products will have an increasing presence in the company's existing store base, the company may see a greater bang for the buck compared to what it might spend to only open new branded stores.

As 2012 draws to a close with Starbucks shares gaining on a multi-year stock run that's led to what are likely four consecutive years of stock gains, analysts are pinning a fifth year of gains on Schultz's M&A and growth execution.

In raising Starbucks price target to $60 from $59 - a near 20% premium to current share prices at $51.46 - Bank of America Merrill Lynch analyst Joseph Buckley highlights the company's new ventures over its dividend or recently reported results.

"Starbucks described its new product pipeline as the most robust ever. Plans for identifiable new products such as Refreshers, Verismo, Evolution Fresh juice, and La Boulange bakery products are taking form and offer more growth potential," wrote Buckley, in a Thursday note to clients. The analyst also highlights strong sales growth, its marketing presence - especially on social media - and the company's 24% dividend hike to 21 cents a share as stabilizers.

After fourth quarter earnings close the books on a strong year for Starbucks, the company's store, earnings and product growth efforts may emerge as the biggest story for investors to follow in 2013. A surprisingly large dividend hike and stronger-than-expected operating results should now be seen as more of a safety net for investors.

Here's another take on Starbucks in a peak coffee era.

For more on other restaurant stocks reporting in November, see why McDonalds is no longer overcooked.

Also see why Chipotle Mexican Grill may be on a market value meal for other restaurants-based stock ideas.

-- Written by Antoine Gara in New York
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