Is Starbucks Corporation (NASDAQ:SBUX) A Good Dividend Stock?

October 12, 2017, 09:24 am ET, BY Simon M.- Contributor| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

Starbucks Corporation (NASDAQ:SBUX) third quarter 2017 earnings report was quite lackluster as the company reported declining customer growth per store; however, store growth in China remains upbeat.

The company’s latest results indicate that the restaurant chain is relying heavily on China, which continues to report massive store growth, to compensate for declining store growth in the EMEA region and the Americas.

Some of the factors working in Starbucks favor include the high levels of customer loyalty among its existing clients. The company is relying on higher spending from its existing customers to boost overall sales as opposed to attracting new customers.

The company is suffering from the same issues facing physical retailers, which are largely driven by declining foot traffic to malls and other retail outlets. This trend is being replicated across the Americas and the EMEA region, which has forced the company to focus on maximizing customer value in order to grow sales.

Starbucks has been paying a dividend to shareholders for the past six years starting in 2011, which marked its transition from a growth stock into a stable dividend stock. The company last paid a 1.85% dividend to shareholders with a 48.5% payout ratio, which was slightly below the average dividend yield in the services sector of 1.97%.

The company has a low price to free cash flow ratio, which means that for dividend investors, this might be an opportune time to invest in the company. However, in order to continue paying a dividend over the long-term, Starbucks has to generate higher free cash flow levels in order to continue hiking dividends.

Many analysts are expecting Starbucks to continue paying a dividend into the future given that its current payout ratio is below 50%. The company’s targeted marketing campaigns have also done extremely well in the past in terms of increasing customer spend and building brand loyalty.

Furthermore, the company cannot rely on generating growth through opening new stores, as this is not a sustainable strategy over the long term. However, emerging markets continue to provide excellent growth opportunities, which combined with higher brand loyalty and higher customer spending in developed countries, should sustain the company over the long-term.

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