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SBUX Stock: Starbucks a Great Long-Term Buy on Recent Dip

Starbucks (SBUX) reported earnings last week, and shares have softened up as a result. Despite Q4 2013 sales increasing 5% at existing U.S. stores, figures disappointed compared with Wall Street expectations of 6.4% growth.

starbucks-sbux-stockGlobally, Starbucks sales were up just 5% vs. expectations of 5.9% growth for another disappointment.

After brisk growth over the last year that sent SBUX stock up almost 50% in 2013 and pushed the forward P/E ratio into the mid-20s, it’s natural to see a bit of cooling off.

But there are reasons to be optimistic, particularly in the long term.

Here are some signs pointing to continued profits ahead for Starbucks investors:

Dividend Growth: Although the headline yield for SBUX stock is just 1.5%, there is a lot of dividend growth potential here. Keep in mind that the company initiated payouts only recently, with its first dividend of 10 cents a share in 2010. Now, dividends are 26 cents per share after a recent increase — but still less than one-third of earnings. SBUX is committed to returning capital to shareholders and clearly has the headroom to do so.

Low Debt: Starbucks only has debt of around $2 billion, and total liabilities just short of $3 billion. Yet SBUX stock clears almost $15 billion in revenue each year and has a market capitalization of $54 billion, meaning its liabilities are 20% of sales and a mere 4% of SBUX market cap. As this chart shows, that simply blows away the ratios of peers that include Dunkin Donuts (DNKN) and Tim Horton’s (THI), as well as loosely similar burger joints McDonald’s (MCD) and Wendy’s (WEN).

sbux-stock-starbucks-debt

Cash: SBUX also happens to be sitting on $1.7 billion in cash and short-term investments. This is not just comforting from a balance sheet perspective, but also in regards to acquisition potential. Starbucks made a bunch of moves over the last few years including the $620 million acquisition of Teavana, the $100 million buyout of Bay Bread and the $30 million acquisition of juice business Evolution Fresh. Clearly SBUX isn’t content to simply shovel coffee and open new cafes, and this dry powder has potential for shareholders.

Technology: This is admittedly a wild card, but Starbucks has mobile payment apps and digital gift cards that are at the forefront of the restaurant biz. Time will tell if any of this affects branding or the likelihood of American’s to choose one java shop over the next, but at least SBUX isn’t standing still — and most will admit mobile payments are certainly a high-potential area, even if the application and winners are unclear.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP

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