Starbucks Corporation (NASDAQ:SBUX) closed at $94.71 on October 2, up 15.35% over twelve months. The shares have risen on the promise of a turnaround rather than on evidence of one. Revenue is still going backwards.
Meanwhile, the company is paying shareholders more than it earns, which is the detail that decides how much patience this situation deserves.
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The Dividend Costs More Than the Profit:
One figure explains the position better than any commentary. Starbucks has a payout ratio of 142.77%. That is not sustainable from profit, and it is being funded from the gap between accounting earnings and the cash the business still produces.
The cash is genuinely there for now. Starbucks generated $4.99 billion of operating cash flow and $3.07 billion of levered free cash flow, which covers the payment comfortably.
The problem is the denominator. A payout ratio above 140% is only alarming because earnings have fallen so far, and net margin is now 5.17% at a company with queues outside its stores. Fix the margin and the payout ratio fixes itself. Nothing else has to change.
That is why revenue falling 1.40% last quarter matters more than any other figure here. A margin recovery needs volume behind it, and the volume is still going the wrong way.
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What the Share Price Already Assumes:
The market has decided to look through all of this. Starbucks trades at 54.42 times trailing earnings of $1.73 a share. That is a multiple normally reserved for companies growing quickly, attached here to one whose revenue is shrinking.
The forward figure of 30.86 times is the clue to what investors expect. It implies earnings rising substantially within a year, and the entire case for owning the stock rests on that recovery arriving.
Earnings did grow 87.20% in the most recent quarter, which is the first real evidence in the bulls’ favor.
The balance sheet reduces the room for error. Starbucks carries $22.45 billion of debt against $3.61 billion of cash, so enterprise value is $126.14 billion against a market value of $107.32 billion.
A company restructuring thousands of stores while funding a dividend out of cash flow and carrying that much debt has very little margin for a weak year. There are ten companies yielding above 5% while their cash flow is still growing. You can find them here.
The Valuation Case:
Sustainability is the wrong question for the current numbers, because nobody is arguing the present level of profit should persist. The argument is about whether it recovers. On price, nothing here is cheap. Enterprise value to EBITDA of 23.80 times is what the market pays for a growing restaurant chain, and this one is shrinking.
