Bullish on Starbucks Stock’s Star CEO, Growing Dividend, and Solid Value

TipRanks

Wed, Aug 14, 2024, 7:30 PM 5 min read

Shares of coffeemaker Starbucks (SBUX) received a jolt of nearly 25% yesterday on news that Chipotle (CMG) CEO Brian Niccols, who is a star when it comes to leadership, will be taking over as CEO in September. Even after this incredible one-day gain (the stock’s largest ever), shares of Starbucks could have plenty of upside ahead. I’m bullish on Starbucks based on the excellent choice it made in the hiring of its new CEO, the company’s reasonable valuation, and its attractive 2.4%-yielding dividend, which is growing.

The Right Man for the Job

With all due respect to outgoing CEO Laxman Narasimhan, who is stepping down after just 17 months in charge, Niccols seems significantly better equipped to right the ship at Starbucks.

For one thing, Narasimhan was an outsider who came to Starbucks with little restaurant industry experience, having previously led consumer staples company Reckitt (the parent company of brands ranging from Lysol to Enfamil).

Conversely, Niccols comes into the job with significant industry experience and is widely viewed as one of the best in the business. He did an outstanding job of leading Taco Bell during his tenure at Yum! Brands (YUM), and during his time at Chipotle (CMG), the stock gained over 770%.

And it’s not like Niccols was given an easy layup when taking over at Chipotle in 2018. The chain was in the process of dealing with its first real adversity as it tried to move beyond the food safety incidents that had recently tarnished its reputation.

Additionally, at a time when other restaurants are struggling amid inflation and consumers cutting back on discretionary spending, Chipotle bucked the trend and posted growing sales and traffic. Last quarter, Chipotle’s traffic increased by 8.7%, and the company’s same-store sales grew by an impressive 11.1%.

For these reasons, Niccols looks like an outstanding choice to lead Starbucks, and he will likely have a strong plan for returning the company to its previously lofty standards. Starbucks chair Mellody Hobson said that when she approached Niccols about the role, he responded, “I know what to do.”

Importantly, it seems that previous CEOs like Laxman and others have struggled to emerge from the shadow of the company’s legendary founder and first CEO, Howard Schultz, who has returned to run the company as CEO multiple times. Starbucks has had three CEOs since 2022 and Schultz has publicly criticized Laxman on both LinkedIn and on podcast appearances, which likely didn’t help matters.

However, I don’t think this will be a problem for Niccols, as he has the gravitas and reputation to put his own stamp on the role without worrying about Schulz’s opinion. In a statement, Schultz said, “Brian will restore trust with our people, rejuvenate the brand, fix operations, improve the customer experience, and create shareholder value…He has my respect and full support.”

Not Particularly Expensive

Even after the massive one-day gain of nearly 25% following the news, Starbucks is still down 11.6% from its 52-week high.

And the stock still doesn’t look super expensive, trading at just 26.9 times 2024 earnings estimates, which is just slightly above the average valuation for the S&P 500 (SPX). Looking further out, the company looks a bit cheaper, trading at 24.1 times 2025 consensus estimates.

These might not be the types of multiples that get deep-value investors pounding the table for the stock, but they’re roughly in line with the broader market and certainly not prohibitively expensive for a blue-chip stock like Starbucks. Plus, there will likely be some pullbacks after the excitement of yesterday’s news wears off that investors can use to find better entry points and dollar-cost average into a long-term position.

Venti Dividend

In addition to this moderate valuation, Starbucks is also a reasonably attractive dividend stock. It now yields a healthy 2.4%, around double the yield of the S&P 500 (SPX), partially as a result of its year-to-date decline. It’s also a solid dividend growth stock, as it has paid dividends for 13 years in a row and increased the level of its dividend payout in each of these years.

Challenges Remain

The stock is not without its challenges, and it won’t be all smooth sailing ahead for Niccols. Traffic to Starbucks locations has fallen, and with it, so have sales and profits.

As consumers feel the pinch from inflation and a higher cost of living, some are cutting expensive discretionary purchases like Starbucks drinks from their budgets. As more customers order for mobile pickup, they aren’t sitting around soaking up the ambiance of the cafes, which was originally part of the reason they were willing to pay a premium for Starbucks beverages.

Niccols will have to figure this all out, but his success in leading Taco Bell and Chipotle inspires confidence in investors.

Is SBUX Stock a Buy, According to Analysts?

Turning to Wall Street, SBUX earns a Moderate Buy consensus rating based on nine Buys, 18 Holds, and zero Sell ratings assigned in the past three months. The average SBUX stock price target of $86.26 implies 8.1% upside potential from current levels.

See more SBUX analyst ratings

Conclusion

Many sell-side analysts have yet to update their price targets since the CEO announcement and were caught offside by the large one-day move,

The announcement that Niccols will be taking the reigns as CEO was exciting news for Starbucks and its shareholders, and the stock responded accordingly with its best day ever.

While this was a large one-day gain, there is still room for additional upside. I’m bullish on Starbucks because Niccols looks well-suited to get the company firing on all cylinders again, as well as because of the stock’s reasonable valuation and attractive 2.4% dividend yield.

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