Starbucks' Growth Offers Better Brew Than Dividend

NEW YORK ( TheStreet) - A quarter ago, Starbucks ( SBUX) 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) and Yum Brands ( YUM), 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.

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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