Considering Starbucks Corp (NASDAQ:SBUX) sat out the broad-market rally of 2023, losing 3.2% throughout the year, and remains negative in 2024 while the S&P 500 Index hits new highs, investors are pondering the wisdom of buying the recent pullback in Starbucks stock, which boasts a 2.43% dividend yield. This analysis delves into the coffee giant’s price movement, financial performance, and analyst projections.

The decline in Starbucks stock is evident, with shares dropping more than 19% from their 52-week high of $115 in May. The descent began after a disappointing outlook accompanied the coffee brewer’s fiscal Q2 earnings report. While there was a positive gap following robust fiscal Q4 earnings in November, the stock has since retraced, currently valuing the Seattle-based coffee chain at $106.7 billion by market cap.

Despite its unimpressive annualized returns, Starbucks has maintained its status as a reliable dividend stock, currently offering a quarterly dividend of $0.57 per share, translating to a forward yield of 2.43%. This is supported by a decade of consistent dividend growth and a reasonable payout ratio of 60%. The dividend is underpinned by a robust and expanding free cash flow, making Starbucks an attractive option for income-focused investors with potential for capital appreciation.

However, despite these dividends, the stock does not come cheap, with a valuation of 2.70x forward sales and 22.79x forward earnings, both at a premium compared to consumer discretionary sector medians.

There are some growth drivers for Starbucks. The company is targeting India for expansion, anticipating a revenue boost as it taps into the growing coffee culture in the region. Additionally, Starbucks is diversifying its menu to drive growth, building on a 20% sales increase for its all-day breakfast menu in the first nine months of 2023.

Projections indicate that Starbucks could outpace its sector peers in growth this year, with forward revenue growth expected at 10.40% and EPS growth at 26.5%. However, the company faces challenges, including rising costs related to labor, commodities, and supply chain issues, along with concerns about consumer spending amid high inflation.

Analysts offer a “moderate buy” consensus on SBUX, with 10 recommending a “strong buy,” one suggesting a “moderate buy,” and 13 advising to “hold.” The average target price from analysts is $111.90, implying a 20% upside potential from current levels.

In conclusion, Starbucks’ recent dip presents both challenges and potential opportunities. Strategic initiatives and positive analyst forecasts suggest a possible rebound, but conservative investors may prefer to wait until after any event-related volatility settles before considering a purchase, especially with the quarterly earnings announcement approaching.

Featured Image: Unsplash @ June Andrei George

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