Starbucks Investing Opportunity for Value, Contrarian, and Dividend Investors

Today is a good moment to talk about Starbucks Corporation. The company stock is now trading at an attractive Valuation around 20x P/E ratio after coming from an almost 25% YTD drop in the share price. The reason behind this bearish market sentiment is the recent sell-off after the company missed the consensus Q4 2021 EPS of 0.80 (vs 0.72 actual). However, even at lower numbers, we will see the stock remains a solid and stable investment with no potential downside scenarios in the medium to long term.

Firstly, the business achieved a wide and strong economic moat, which is shown by a consistently high ROIC above 15%. Starbucks’ wide economic moat which has been built through a fast-growing network of retail store locations, its international replicability, attractive unit-level economics, quality, and innovation advantages over low-cost coffee, and strong comparable-store sales by spending a smaller marketing budget than peers. All of them have led the company to a strong market position while underpinning the brand as intangible asset till the point Starbucks has reached a global brand recognition and a remarkable pricing power.

Starbucks' strategy consisting of offering differentiated products packaged with powerful marketing has performed well over the years by attracting the masses into its vast customer base. Starbucks rewards and loyalty programs have played a crucial role in retaining consumer loyalty, with almost an 80% score on the American Consumer Satisfaction Index (ACSI).

The Starbucks Rewards membership program also keeps performing well and growing by over 20%, while store traffic increases by 12%. This means more and more clients are becoming members of the program while the company continues building loyalty. Simultaneously, this reduces churn, and spending levels by clients in the store grow up (as members tend to spend more than casual clients). This gives Starbucks access to its clients even in case they are not in the store as well, and it is possible for the company leverages it in the future.

The company's growth is fuelled by solid long-term organic growth coming from the expansion to other suburban locations and developing countries where rent per capita rises. With over half of its over 34,000 stores located in Canada and the United States, Starbucks has moved to a robust new store development program focused on opening up new distribution channels at existing stores, primarily focused in the suburbs, because there's considerable latent and unsatisfied demand.

In regard to the expansion to developing countries, China is the main growth initiative at the present. The program Starbucks Now is now planning to make up 10% of the 600 stores it plans to open in China during the next year. The company now has over 5,500 stores in China out of the total 34,000 stores and these ones are outperforming American stores while achieving a great adoption of the membership program in China. All in all, Starbucks expects to increase its stores by more than 60% to 55,000 locations worldwide by 2030, a CAGR of around 6% which is the same growth rate as at the present.

Moreover, Starbucks has shown a stable revenue growth growing consistently with a CAGR of 8.2% since 2012 (including the drop during the global pandemic shutdown):

This sales growth is translated into an equally solid EPS growth due to its outstanding cost structure. Besides, the company has constantly bought back shares over the last decade, which is supporting EPS growth and return capital to shareholders.

All in all, it is a good long-term investment opportunity for Value and Contrarian Investors. The current 20x P/E valuation multiple is reasonable for a company that has shown a constant double digits growth also expected to continue in the medium term. Historically, the company achieved a low 10-year return of almost 224% compared to S&P 500's 214% (even lower than S&P 500 if considering a 5-year return instead, almost 70% compared to S&P 500's 94%). However, this "low" return is also supported by very low volatility.

Furthermore, the company pays roughly 50% of its EPS in dividends so that investors can enjoy a dividend yield of 2.14%, which is on the high side historically. This attractive dividend payout ratio makes Starbucks quite attractive to dividend growth investors, especially considering the company has consistently increased them since 2015 (5-year dividend growth CAGR of almost 16%). Going forward, investors should expect the dividend increases to be in line with EPS growth.

From the point of view of the consensus, the recommendation is overweight due to growth is expected to continue and a target price of $115, which exemplifies over 30% upside potential.

Lastly, in regard to the concerns, they are the recent regional shutdowns such as in Shanghai at this moment, the management's intention to stop union elections (which might damage its reputation if considering the considerable amount paid to stockholders), the fact that Starbucks on April 6th suspended its share buyback program, the currently high inflation rates for coffee that will imply higher expenses for the company, and the current worrying recession risk that already affected considerably the company in 2008 crisis because its product is considered consumer discretionary for the clients. However, all of them are concerns that might only be sustainable in the short-term, and these along with the recent sell-off might have turned into a market overreaction and bearish market sentiment that long-term investors can benefit from if they get to buy the company trading at a reasonable safety margin, like the current one at 20x P/E multiple.