The maturing of Starbucks

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Many of the coffee drinkers who grew up with Starbucks Corp. have learned to put their youthful thrill-seeking behind them and settle into a more stable, mature lifestyle. Now, analysts say, the coffee-shop giant has come to accept the same thing about its business.

Starbucks on Wednesday unveiled the first dividend in its 25-year history as a publicly traded company, a quarterly payment of 10 cents (U.S.) per common share. The move marks a coming of age for Starbucks' stock - moving it from its long-time reputation as an aggressive growth play to the status of a mature dividend-payer.

After initially rising on the news, Starbucks stock was down 13 cents, or 0.5 per cent, at $25.28 in afternoon trading. The muted reaction partly reflected the fact that investors had widely expected the company to introduce a dividend after chief financial officer Troy Alstead had hinted at it when the company released its quarterly earnings in January. But it also suggested the market will be grappling with how to look at the stock going forward, given its new mature look.

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"Starbucks would seem to have crossed the Rubicon from being a sweet young 'growth' stock to accepting its position as a mature, even 'value,' stock," wrote Jon Talton, columnist for Starbucks' hometown newspaper the Seattle Times, in a blog posting Wednesday.

"We believe a dividend makes sense, since Starbucks has entered a phase of slower store development and the development of a recurring, high-income consumer products business," said David Palmer, analyst at UBS Securities in New York, in a note to clients. "An added benefit is that the dividend should help widen SBUX's investor base."

Starbucks' status as a rapidly growing business ran into a wall in 2008, when its same-store sales shrank for the first time in history. With its sales further battered by the recession and competition from McDonald's, the company put a halt to its rapid proliferation of new-store openings, slashed staff and cut costs.

The aftermath left the company flush with cash. At the end of 2009, the company had $1.3-billion in cash, and it projects that free cash flow will top $1-billion in fiscal 2010. All that cash has allowed the chain not only to introduce the dividend, but also to increase the size of its share-buyback program by 15 million shares - valued at about $380-million at current market prices.

The dividend, which represents a 1.6-per-cent dividend yield and a payout ratio of 35-40 per cent of its forecast fiscal 2010 earnings, was higher than many analysts had anticipated. Typically, first-time dividend payers target a 1-per-cent yield. Still, Starbucks' payment is at the low end of the range for mature stocks in the food-retail sector, where roughly 2 per cent is the more typical yield, said Barclays Capital analyst Jeffrey Bernstein.