Will Starbucks Raise Its Dividend in 2016?

“Coffee Traveler” image source: Starbucks

Corporation

Starbucks Is Exhibiting

Operational Strength

Fiscal 2015 (which ended September 27, 2015) was a record-setting year:

• Record revenue and net income of $19.2 billion and $2.8 billion, respectively.

• In Q4 2015, each business segment achieved operating income margin in excess of 15% for the first time in company history.

• Highest ever annual free cash flow of $2.4 billion.

““In fiscal 2015, we returned a record $2.4 billion of cash to our shareholders through a combination of dividends and share buybacks, up over 50% from 2014 levels. And today, we announced that our board has approved a 25% increase in our quarterly dividend to $0.20 per share.”

--Starbucks CFO Scott Maw, Fiscal Q4 2015 Earnings Conference Call

Cash Returns: Going back to 2013,

Starbucks has been even more aggressive in returning excess cash than CFO Maw indicated. During the three-year period, it’s nearly doubled payouts to shareholders:

Mermaid image: Starbucks Corporation

Dividends + Share Buybacks

2015

⊡ Dividends: $0.92 billion

⊡ Share repurchases: $1.44 billion

⊡ Total: $2.36 billion

2014

⊡ Dividends: $0.78 billion

⊡ Share repurchases: $0.76 billion

⊡ Total: $1.54 billion

2013

⊡ Dividends: $0.63 billion

⊡ Share repurchases: $0.59 billion

⊡ Total: $1.22 billion

Fiscal years 2015, 2014, and 2013:

Starbucks Is Projecting Another

Impressive Year

Management Guidance for Fiscal 2016:

• Revenue growth of 10%+.• Global comparable sales growth

“somewhat above mid-single digits.”• 1,800 global store openings.• Operating margin to increase slightly

versus prior year.

The Point:Starbucks should again see excellent operational and free cash flows in 2016. Any dividend increase will be at the discretion of management and the company's board of directors.

Management MUST Consider:

Capital ExpendituresEach year the company must pay for property and equipment, which includes fixed assets tied to store expansion, before making payments to shareholders. Capital expenditures, or “CAP-EX,” come before cash shareholder returns in priority.

Management MUST Consider:

2016 CAP-EXStarbucks projects a 2016 CAP-EX total of $1.4 billion. If the company generates similar operating cash flow to fiscal 2015 ($3.7 billion), it will have ample cash left after CAP-EX to fund the roughly $1.16 billion in dividends declared for next year. This also bodes well for the announcement of a dividend increase in calendar year 2016.

Other Management Considerations:1) Payout ratio: This is the total dividend payout

expressed as a percentage of net income. Starbucks’ recent payout ratio calculates to a quite manageable 35%.

2) Yield: Starbucks’ increasing stock price keeps depressing its dividend yield, which is currently at 1.33%. A 2016 increase in dividend will help the yield keep pace with a rising share price.

Going Forward

1. Starbucks’ recent stock appreciation is no fluke; the company’s financial underpinnings are currently quite solid.

2. There are ample resources for another dividend increase to be declared during the latter part of calendar year 2016, which will be effective for fiscal 2017.

3. Thus, it’s highly likely that, barring unforeseen issues, Starbucks Corporation will continue to share its spoils with shareholders, and declare another dividend increase next year.

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