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20Jun 2012
The Starbucks Dividend: How many stars does it get?
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Company numbers are TTM (trailing twelve months) or latest available. Share price data is previous day’s close unless otherwise stated.
Overview
- Over the last twelve months, SBUX-US paid a medium quality dividend, which has a current yield of 1.2%.
- Dividends were paid for 2 of the last five years — all of them were also of high quality.
- The ending cash balance, with a dividend coverage of 5.0x, provides a substantial cushion in case of a significant reduction of cash flows in the future.
Dividend Yield and Payout
Cash flow coverage of the dividend paid is more relevant than dividend payout.
While traditional dividend analysis focuses on dividend payout from net income, we focus on the cash flow coverage of dividends in order to determine their quality and sustainability. We assess whether dividends are being paid from operating, investing and issuance cash flows or whether the beginning cash balance is needed to make this payment. We make the assumption that cash dividends are paid only after net debt repayments. We consider the cash outflow from share buybacks to be discretionary and thus ignore its impact on cash required to support the dividend policy.
Dividends that are fully covered from operating and investing cash flow net of any cash outflow from debt repayments and net of a decrease in deposits (for banks) are considered to be “high quality”. Those that require an additional net cash inflow from issuance are categorized as “medium quality”. If operating, investing and issuance cash flows are not sufficient to fund the dividend and the beginning cash balance is used, the dividend is referred to as “low quality”.
This last category is most at risk of a dividend cut though we recognize that companies that have a large cash balance could continue to pay dividends even with a “low quality” dividend profile. For all these definitions, we assume the cash outlay for share buybacks is discretionary and can instead be used to support dividends.
SBUX-US’s dividend payout is similar to the peer median.
Of the 10 chosen peers for the company, dividends are paid by only 8 of the stocks (non-dividend paying peers include PNRA-US and GMCR-US). SBUX-US’s current dividend yield of 1.2% and a dividend payout of 37.0% over the last twelve months compare to a peer median level of 1.8% and 37.0% respectively. Relative to its peers, the firm is generating a low dividend yield along with a median dividend payout, which suggests some dividend flexibility based on this traditional analysis.
Dividend Coverage
Over the last twelve months, SBUX-US paid a medium quality dividend.
The source of the company’s cash to support the dividend paid over the last twelve months is operating cash flow (coverage of 3.4x), investing cash flow (coverage of -2.6x), issuance cash flow (coverage of -0.2x) and twelve-month prior cash (coverage of 4.3x), for a total dividend coverage of 6.0x. SBUX-US’s issuance cash flow includes outflows from net share buybacks (coverage of -0.6x). Thus, the total coverage including share buybacks is 6.6x, which reflects our assumption that the cash paid for share buybacks is discretionary and could instead be used to pay dividends.
These coverage ratio factors imply that the firm’s net cash inflow from issuance was required (in addition to operating and investment cash) to pay the dividend, which suggests a medium dividend quality. SBUX-US’s dividend quality is not in line with a majority of its peers, which comprise 7 high quality and 1 medium quality.
Over the last five years, all dividends paid were of high quality.
SBUX-US has paid a dividend in 2 of its last five years. For each of these years, the dividend was consistently of high quality. Most recently, the high quality dividend coverage has decreased to 1.5x in 2011 from 5.3x in the prior year.
SBUX-US’s dividend has a strong cushion from the ending cash balance.
Even though the dividend yield is low relative to peers, it is of medium quality in this period. Assuming the cash dividend paid remains constant, the medium quality coverage would need to deteriorate by 13% before the company dips into its beginning cash balance to fund the dividend payment.
This level of deterioration in overall cash flows is not unlikely in the course of business suggesting a current dividend quality that is moderately robust. The ending cash balance, with a dividend coverage of 5.0x, provides a substantial cushion in case of a significant reduction of cash flows in the future.
Dividend Yield % vs. Quality charted with respect to Peers for SBUX
Company Profile
Starbucks Corp. is the premier roaster, marketer and retailer of specialty coffee. The company purchases and roasts high-quality whole bean coffees that it sells, along with handcrafted coffee and tea beverages and a variety of fresh food items, through company-operated stores. It also sells coffee and tea products and licenses its trademark through other channels such as licensed stores, grocery and national foodservice accounts. The company operates through three business segments: United States, International and Global Consumer Products Group. The United States segment sells coffee and other beverages, complementary food, whole bean coffees, and a focused selection of merchandise primarily through company-operated stores. Other operations within the U.S. include licensed stores. The International segment sells coffee and other beverages, complementary food, whole bean coffees, and a focused selection of merchandise through company-operated stores in Canada, the UK, and several other markets. Other operations in international markets primarily include retail store licensing operations and foodservice accounts, primarily in the UK and Canada. The Global Consumer Products Group segment sells a selection of whole bean and ground coffees as well as a selection of premium Tazo teas in the U.S. and international markets. Its operations include production and sale of ready-to-drink beverages, including bottled Frappuccino beverages, Starbucks DoubleShot espresso drinks, and Discoveries chilled cup coffee. In addition, it also produces and sells Starbucks VIA Ready Brew, as well as Starbucks super-premium ice creams through its marketing and distribution agreements and a joint venture. The U.S. foodservice business sells coffee and other related products to institutional foodservice companies with the majority of its sales through national broadline distribution networks. The company was founded by Howard S. Schultz in 1985 and is headquartered in Seattle, WA.
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