On October 22, Starbucks (SBUX 0.17%) announced its 14th consecutive annual dividend increase, increasing the quarterly payout by 7% to $0.61 per share or $2.44 per share per year. Starbucks started out as a growth stock, but has since transformed into a very reliable dividend stock with a forward yield of 2.6%. The dividend has become a critical part of Starbucks’ investment thesis. Like clockwork, investors were able to count on annual increases every September or October.

Here’s Why Starbucks Stock Was Actually down on the morning of October 23, and if the dividend stocks It’s worth buying now.

Image source: Getty Images.

Starbucks in the spotlight

Starbucks investors have had a rollercoaster ride in 2024. The stock fell in May after reporting disappointing second-quarter results. The third-quarter results weren’t much better, but at least they indicated that Starbucks may have started to correct its course.

On August 9, reports surfaced that activist investor Starboard Value had taken a stake in the company, a sign that a shakeup may be in order. Then the big news came on August 13 when Starbucks announced that it had poached the highly regarded Chipotle Mexican Grill CEO Brian Niccol will become Starbucks’ new chairman and CEO. The stock rose 25% on August 13, its best single-session performance in history.

On September 10, Niccol wrote a letter titled Return to Starbuckswho discussed the power of the brand, a return to the café style that made it beloved in the first place, and a renewed focus on quality ingredients and passionate baristas.

The stock price had mostly held onto its gains from Aug. 13, a sign of optimism that investors were looking forward to the fourth-quarter and full-year 2024 report on Oct. 30, rather than dreading it . That is, until Starbucks announced its quarterly results on October 22.

A painful reminder

Companies sometimes choose to announce preliminary results when they want to soften the blow of a poor earnings report or simply to focus attention on the future rather than the past. This certainly seems like what Starbucks is doing, given its terrible results.

Preliminary results showed a global same-store sales (comps) decline of 7%; a drop in consolidated net sales of 3%; and a $0.80 decline in earnings per share (EPS), which represents a 25% decline under generally accepted accounting principles (GAAP) and 24% on an adjusted or non-GAAP basis.

For the entire financial year, remuneration was down 2%; consolidated net turnover is up 1%; and GAAP and adjusted EPS was $3.31, down 8% on a GAAP basis.

Starbucks was coming off a record year with $36 billion in sales and $3.58 in EPS. But despite this record year, the stock price stagnated because results were not that impressive compared to pre-pandemic numbers and growth prospects (especially in China) appeared to be weakening.

As you can see in the chart, earnings rebounded nicely after a brutal 2020, but fiscal 2024 profits weren’t that impressive compared to pre-pandemic years due to lower margins.

SBUX income (annual); data by Y charts. TTM = last 12 months.

In addition to the preliminary results and dividend increase, Starbucks released a video from Niccol titled The way forward. He did not hesitate to talk about the poor results, probably in an attempt to make it clear that these results were only part of his mandate as CEO and that the future would be different. He said the following in the video:

People love Starbucks, but some customers have told me that we have strayed from our core business, made it harder to be a customer than it should be, and stopped communicating with them. As a result, some come less often, and I think today’s results tell the same story. To welcome back all our customers and return to growth, we must fundamentally change our recent strategy.

The upcoming earnings conference call will be an opportunity for Niccol and the rest of the management team to prove to analysts why the path forward will be worth taking for investors. Specifically, they should monitor how the CEO approaches customer and employee experience improvements, the cost of those improvements, and whether they coincide with remodeling stores or building new stores to resemble the style of classic coffee shops. Perhaps we will have new food and drink offerings to enrich this style.

The company’s second-largest market, China, was its main growth catalyst but has since become its biggest problem. In the video, Niccol said the United States would be the priority in the short term and that Starbucks would focus on returning China and the rest of international business to growth.

All in all, the message calls on Starbucks to return to its roots and restore its brand.

The recovery is far from complete

Starbucks is at a crossroads. The stock price is about the same price today as it was five years ago, and investors are growing impatient with the company’s over-promising and under-delivering. It desperately needed new leadership, and Niccol could be the person to steer the ship in the right direction. But until there are significant signs of improvement, the company will likely remain in wait-and-see mode.

The good news is that the results aren’t terrible. The company remains very profitable and can more than afford to pay its dividend with its profits. The return is solid, especially compared to what investors can get from a consumer discretionary exchange traded fund or a S&P500 index fund.

Investors who believe in the brand and agree with Niccol that its problems can be solved might benefit from buying shares of the coffee chain. But Starbucks could remain a volatile stock until it lays its new foundation and Wall Street digests management’s plans for the company’s future.