Starbucks Corporation (NASDAQ: SBUX) Is Transitioning From A Growth Company

December 01, 2017, 11:32 am ET, BY Simon M.- Contributor| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

Starbucks Corporation (NASDAQ: SBUX) shareholders witnessed a massive appreciation in their shares from the lows of early 2009 up to November 2015 as the stock appreciated by about 1200% over this period. However, the stock has been stuck in a tight trading range for the last two years, which leads us to the conclusion that the rapid growth phase has passed, and that the company is now transitioning into a dividend growth stock.

Article Summary

Starbucks is currently transitioning from a growth company into a dividend stalwart.

The company’s rising debt levels have led to a downgrade of its debt by Moody’s.

The company has identified China and food sales as key drivers of future growth.

Here’s the trading report on SBUX.

The restaurant chain has increased its dividend payout by about 24% in the last six years with the management announcing a 20% increase at the end of fiscal 2017. It is the consistent dividend hikes that have led most analysts to the conclusion that Starbucks is transitioning from a growth-oriented company into a dividend stalwart.

The company remains one of the strongest global restaurant brands in the world competing effectively with other global brands such as McDonald's Corporation (NYSE: MCD). The company’s current initiatives, which include its aggressive expansion in China as well as assuming control of its Japanese stores are bound to grow its global presence.

The company is facing significant headwinds, which include its rising debt burden pegged at 42% of its total capital structure. The company’s rising debt levels led Moody's Corporation (NYSE: MCO) to downgrade its senior unsecured ratings to A3 from A2 and short term commercial paper rating to Prime-2 from Prime-1. The move was triggered by Starbuck’s new plan to return $15 billion to shareholders over the next three years through share buybacks and dividends.

According to Moody’s, Starbucks’ move to return a fixed sum to shareholders, some of which will be funded by more debt, represents a shift to a position favoring shareholders as opposed to creditors. The company has so far generated high returns on invested capital in the recent past, which was not fueled by increasing margins, but rather by higher leverage levels.

Given that the company’s comparable sales growth has significantly decelerated, the management is focusing on food sales as way of boosting revenues in its core North American market. The company is also focused on growing its presence in China and the greater Asia-Pacific region, which is categorized as a growth market, and could fuel the company’s future growth.

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