How Safe is Starbucks Corporation's Stock and Its Dividend?

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When Starbucks founder and CEO Howard Schultz left his company in 2000, the coffee slinger lost its way. The quality of the coffee and communal experience within its stores was lost, and the company expanded its base far beyond its reach.

Upon Schultz's return, stores were closed and the company refocused on its goal of making a "third place" where people could gather. Since then, the company's stock has quadrupled. While that's great news for folks who bought shares in the company during this time, it does little to help today's investors -- who have an eye toward the future.

How safe is Starbucks' stock and its dividend moving forward? Read on to find out.


The most important metric for dividend investors
For folks who are interested in receiving regular dividend payments to supplement their income, there's no metric more crucial than free cash flow. This number represents the total amount of money a company brings in, minus its capital expenditures. At the end of each quarter, the company's dividend is paid out from that free cash flow.

Here's what Starbucks' free cash flow and dividend situation looked like from 2010 to 2013.

There are a couple different ways this could be viewed. On the positive side, during fiscal 2013, Starbucks only used 36% of its free cash flow to pay out dividends. That means the company has lots of room to grow the payout. And if the company's business goes through a tough spot, it should easily be able to continue paying its dividend.

On the other hand, investors might be alarmed by the downward trend in free cash flow from 2010 to 2012. But it's important to put this downtrend in perspective: free cash flow is a number arrived at after subtracting capital expenditures. In Starbucks' case, "capital expenditures" include building out new locations, particularly in the Asia-Pacific region.

In fact, capital expenditures increased 160% between 2010 and 2013. Though that means free cash flow was lower, it's a positive sign that Starbucks believes it can grow its brand internationally -- and pay for that expansion from operations, instead of taking on debt or issuing more stock.

Does that make Starbucks a buy?
Two metrics are critical to understand when evaluating the overall health of a company like Starbucks: comparable store sales, or comps, and profit margins. Any store can grow revenue by building new stores -- which Starbucks is actively doing -- but it takes a particularly successful company to continually grow sales at already-existing locations. This is what comps measure.

As far as profit margins go, when a company is bringing in billions of dollars in revenue every year, slight improvements can mean hundreds of millions of dollars flowing to the bottom line and into investors' pockets.

Here's what Starbucks' comps and profit margins looked like from 2010 to 2013.

By and large, this is exceedingly good news for investors. Having comps that are well north of the rate of inflation is a very positive sign. And the company's ability to expand profit margins is enviable.

Moving forward, the company's major growth driver will be its build out of locations in Asia, particularly China. Starbucks sees an enormous opportunity in the Middle Kingdom, and it is diversifying its offerings --primarily through the acquisition of Teavana -- in order to capitalize on the opportunity.

The other major segment of the business to focus on will be its attempts to diversify offerings. Along with tea, the company is attempting to become a location people can go to for quality food offerings.

Though some might scoff at this, we need to remember that many investors balked at the idea that Starbucks' Via instant coffee could be a success. That small part of the corporation now brings in over $65 million per year in revenue.

All that leaves us with is the stock's price. Starbucks today trades for 29 times non-generally accepted accounting principles earnings. That's expensive. Also important to consider is that the company's dividend only yields 1.4%, which is low by dividend investors' standards.

That being said, this is a high-quality company that will no doubt increase its payout significantly once it reaches market saturation -- whenever that day comes. Investors who want to own a piece would be well served to buy a smaller starter position, and add to it at better and better value points over time.

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The article How Safe is Starbucks Corporation's Stock and Its Dividend? originally appeared on

Brian Stoffel owns shares of Starbucks. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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