SBUX dividend ends growth era

Starbucks already was getting smaller after 7,000 layoffs and 300 store closings, but a 10-cent payout will limit future growth, too

By InvestorPlace Mar 24, 2010 10:54AM

starbucks dividendStarbucks (SBUX) just announced today that it will begin paying regular quarterly dividends of 10 cents a share. The Seattle company also said it will buy back an extra 15 million SBUX shares over a previously announced 6.3 million buyback plan. Investors cheered this news today, with the stock up as much as 2% on a down day for the Dow.

 

But lost in the headlines is the fact that Starbucks is essentially giving up on its previous plans for world coffee domination. As recently as this morning, the company’s own investor relations FAQ online said that, "Starbucks has never paid a cash dividend and presently intends to retain earnings to help finance the company’s continued growth." Now, in a press release today Starbucks said the company plans to grow "through stores, innovation and new platforms."  


In plain English: Aggressive growth and store expansion are no longer top priorities at Starbucks.

 

That’s a humbling admission for Starbucks, but not altogether unexpected. SBUX is working through plans to close 300 stores and lay off 7,000 employees, and it would not be logical to return to the runaway expansion plans of the past after this downsizing. Starbucks’ dividend announcement means that the company will no longer have the cash to ramp up aggressive growth plans like it once did, and is going to have to be realistic about the future and find ways to boost profits (and share price) going forward.

Starbucks isn’t fading away, that’s for sure. The company is a quality brand that will always resonate with consumers. But the fact is that SBUX didn’t adapt well to the changing economic landscape or its competition, and subsequently lost its edge. Take fellow blue chip restaurant stock McDonald’s (MCD), which boosted profits with affordable McCafe offerings. Or in-home, gourmet coffee brewing from companies like Green Mountain Coffee Roasters (GMCR), Peet’s Coffee and Tea (PEET) and others. Starbucks may have a special place in the hearts of some coffee drinkers, but that doesn’t mean it’s the only game in town.

 

Thankfully for SBUX shareholders, in the past several months Starbucks has been adapting its business model to reconnect with consumers.  In the last year alone, Starbucks has launched a line of “skinny lattes” with less than 200 calories a drink as a way to cater to health-conscious consumers, and marketed its Via instant coffee for just $1 a cup to appeal to cost-conscious customers. Starbucks also launched a plan to roll out its Seattle’s Best brand at Burger King (BKC) restaurants, and offer affordable panini sandwiches for the lunch crowd.

 

The dividend announcement today is the next step in Starbucks’ comeback story, though this is more obviously aimed at winning over investors instead of java junkies. And the timing couldn’t be better -- Starbucks recently posted strong earnings at the end of January, easily topping earnings per share estimates of 28 cent, thanks to same-store sales growth of about 4%. The timing of this dividend announcement in the “dead zone” between earnings seasons (SBUX reports Q1 numbers on April 21) appears to be a move to keep momentum going behind the stock. Shares are up 17% since the end of January.

But investors should be cautious before buying in to Starbucks, since this dividend is a near-admission that the company has reached critical mass. By dedicating its profits to quarterly payouts instead of growth, the company has signaled a significant shift in priorities.

 

What’s more, SBUX shares may have already seen the lion’s share of their gains. Starbucks was one of Wall Street’s biggest success stories, racing up about 560% from the end of 1999 to mid-2006. But shares were overbought and the company grew too fast, and SBUX started down a slippery slope that was greased by the financial crisis. Shares bottomed out at $9 a year ago -- down dramatically from their peak of nearly $40 in May 2006.

 

Shares have been surging recently, almost tripling since the March 2009 lows, but investors should be cautious about expecting such dramatic growth from a company that will spending its cash on keeping investors happy instead of expansion plans. The dividend is nice, but is a sign that the go-go days of Starbucks may be over for good.

 

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