This Dividend Stock Is Down 37%: Is It Ready to Skyrocket?

It’s important to always maintain a long-term view when looking at stocks to buy.

While many investors want the stocks that they own to soar in price over time, there are some market participants who appreciate the passive income that their holdings throw off on a consistent basis. Starbucks (SBUX -1.75%) might catch the attention of these folks.

The world’s leading coffee enterprise has paid a steadily rising dividend since 2010. The current yield sits at a healthy 2.9%. The only issue is that this stock is down 37% from its peak price, which was hit in July 2021.

Might Starbucks shares be ready to skyrocket again?

Hitting a rough patch

The company’s stock performance in recent years might cause you to scratch your head. That’s because fiscal 2023 revenue of $36 billion was 24% higher than the coffee chain generated in 2021, with operating income up 21% over that two-year stretch. Unsurprisingly, the business took a hit during the pandemic’s height, but it has since been on a solid recovery path.

However, shares have been on a downswing in the past 14 months, and they immediately dipped 16% following the second-quarter 2024 (ended March 31) financial update. It’s not hard to figure out why.

During the 13-week period, same-store sales declined 3% in the U.S., which is the company’s most important market. This was driven by a troubling 7% drop in transaction counts. In the huge China market, it’s a worse situation as same-store sales tanked 11%. CEO Laxman Narasimhan called this a “challenging operating environment” as consumers become more selective with their spending.

Scaring investors even more was the fact that management lowered guidance for fiscal 2024. It now expects revenue to increase by low single digits, down from a prior range of 7% to 10%.

Favorable qualities

It’s not encouraging for shareholders to see Starbucks in this state. But for long-term investors, it’s important to stay focused on the company’s favorable qualities, of which there are many.

For starters, Starbucks has a wide economic moat, stemming from its brand strength, that protects its competitive position. There is something about Starbucks that has differentiated it and allowed it to resonate with consumers. It’s hard to quantify a brand’s status. But I think the fact that the company has typically been able to grow same-store sales through higher prices and foot traffic over long stretches of time demonstrates it has something special.

Plus, it helps that Starbucks’ average gross margin over the past 10 years, for example, is a superb 28.2%. This might go overlooked, but Starbucks is a consistently profitable and financially sound enterprise. Ongoing positive earnings and free cash flow are precisely what help the business fund its dividend payouts.

And the expansion isn’t finished. As of March 31, there were nearly 39,000 Starbucks locations scattered across the globe. That’s a ridiculously large figure. However, management believes there is still a sizable growth runway going forward. By 2030, the goal is to have a whopping 55,000 locations open, at which point sales and earnings will be much higher than they are today.

Low market expectations

Investors have clearly soured on Starbucks. The shares have taken a hit because there’s uncertainty as to when things will start to improve.

But this pessimism creates a buying opportunity for those who can look out over the next three to five years. Starbucks trades at a price-to-sales ratio of under 2.5 right now. Shares have basically never been cheaper in the past decade.

To be clear, I’m not entirely sure that the stock will skyrocket. However, based on the company’s positive attributes, I’m optimistic about this investment working out well for buyers.

Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Starbucks. The Motley Fool has a disclosure policy.

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