At the time of this writing, Starbucks(NASDAQ: SBUX) has tumbled a painful 8.7% over the past week -- likely due to soaring Arabica coffee bean prices and a broader market sell-off.
Starbucks is down year to date despite gains in the broader indexes, but the company could be turning the corner. Here are five reasons why Starbucks is a quality dividend stock worth buying in 2025.
1. A recovery is well underway
On Aug. 13, Starbucks stock gained almost 25% in response to news that Brian Niccol would take over as CEO. The move showed just how badly the company needed a leadership change. Niccol's impeccable track record as CEO of Chipotle Mexican Grill should translate well to Starbucks.
In late October, Niccol led his first earnings call as Starbucks' CEO, discussing several strategies that would take the company back to its roots. Starbucks pioneered restaurant mobile apps and mobile ordering, which boosted sales volume and margins and allowed customers to skip the line and save time. But mobile ordering also made the Starbucks experience more transactional, and strained employees who became overwhelmed with mobile orders during peak periods.
A key aspect of Niccol's strategy is to return Starbucks to being a "third place," away from work and home, where folks can relax and enjoy the experience of a handcrafted beverage. Returning to a third place involves improving the quality of its food and beverage offerings and the customer and employee experience. The strategy also involves not price-pinching on certain items. For example, Starbucks has made nondairy cream options free again, and is bringing back condiment stations so customers can spruce up their drinks.
The strategy makes a ton of sense on paper, but may be more challenging to implement than investors initially realized. Starbucks must balance restoring its brand with not hurting the improvements that contributed to rapid sales growth in recent years. The realization that further improvements could take time may be why the stock price has gone practically nowhere since Niccol's announcement in August.
2. Starbucks has identified ways to boost efficiency
Long-term investors know that good things take time. When turning a business around, it's far more important to get a strategy right and chart a path toward sustainable future growth than to rush the process and have to restart the turnaround.
Starbucks has a lot of momentum going into the new year. As you can see in the chart, sales are near an all-time high, and operating margins have fully recovered from the COVID-19 pandemic:
However, margins are still down from pre-pandemic levels. One way to juice margins would be to improve order processing systems. On the earnings call (for the fourth quarter of Starbucks' fiscal 2024, which ended Sept. 29), Niccol went into detail on the Siren Craft System, which is a series of improvements to lower wait times and make the customer experience more enjoyable. Niccol also identified supply chain improvements that could help Starbucks lower costs and boost margins.
It's worth noting that neither of these improvements relies on price increases to grow margins. In recent years, Starbucks overly relied on price increases to offset inflationary costs and boost near-term profits. But price increases have their limits, especially with food and beverages, since there's no shortage of alternatives.
3. There's room for improvement in China
Starbucks has long hoped it will one day have more stores in China than in the U.S. In 2017, former CEO (and Starbucks founder) Howard Schultz predicted China would eventually have twice as many locations as the U.S. But as of the most recent quarter, Starbucks locations in the U.S. are still more than double those in China.
China has not been performing well lately. Starbucks has had three consecutive quarters of year-over-year declines in same-store sales across key markets.
In retail, it's important to understand that not all revenue growth is the same. The best kind of revenue growth is in same-store sales, because it illustrates strength in the underlying product. New store openings and price increases can help sales growth in the near term, but if comparables are declining, they will probably lead to lower margins.
Sure enough, Starbucks opened 722 new stores in its recent quarter, boosting the overall store count by 1.8%. And yet, because comparable sales declined 7%, overall revenue fell 3%. That means that new store openings were not enough to offset declines at existing stores.
China is essential for getting Starbucks back on track. It isn't the only company struggling in the region. The Chinese economy, in general, has taken a hit, especially in discretionary goods spending. Watch closely to see how Starbucks navigates China, and whether the new management can reignite growth.
4. Starbucks has a stable and growing dividend
Starbucks isn't the high-octane growth stock it once was. The company has become an established industry leader, with moderate growth and a growing dividend.
That dividend is a key aspect of the investment thesis for the stock. On Oct. 22, for the 14th consecutive year, Starbucks raised its quarterly dividend to $0.61 per share. During that period, Starbucks has raised its payout at a compound annual growth rate of around 20%, although recent raises have mostly been in the high-single-digit range.
Consistent and sizable dividend raises paired with a languishing stock price have boosted Starbucks' yield to 2.7% -- which is considerably higher than the S&P 500's dividend yield of 1.2%. It's also a higher yield than those of well-known stodgy dividend-paying companies like Procter & Gamble, and the yield is nearly as high as Coca-Cola's. Starbucks' dividend provides a worthwhile incentive to hold the stock and to be patient during the turnaround.
5. Starbucks has a compelling valuation
Starbucks stands out as a great value in a relatively expensive market. Its price-to-earnings (P/E) ratio is below its 10-year median, while its price-to-sales (P/S) ratio is considerably below the 10-year median:
Granted, Starbucks arguably deserves to have a far lower P/S ratio than in the past, because it isn't growing as quickly and is generating lower margins. But if Niccol's strategies are effective, costs come down due to internal improvements, and same-store sales growth returns in key regions like the U.S. and China, then the stock will look too cheap to ignore.
Starbucks is a balanced buy for 2025
Starbucks has been a disappointment to long-term shareholders for several years now. The stock price is up just 4.4% in the past five years, compared to a rip-roaring 89.4% gain in the S&P 500.
Some investors may prefer to wait and see how Starbucks navigates internal challenges, restores its brand, and deals with macroeconomic headwinds in China. But if you're confident that Starbucks is turning the corner, you're getting a great price to buy this quality dividend stock now.
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Daniel Foelber has positions in Starbucks. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.