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.

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