Starbucks Joins the Ranks of Dividend Stocks

Starbucks (SBUX: 78.70 +1.40%) joins the ranks of dividend stocks after announcing this morning that the company will initiate a quarterly cash dividend of $.10 per share.

Following the dividend announcement, Starbucks stock will now offer investors a current yield of 1.6%. Business Week had speculated yesterday that Starbucks would initiate a quarterly dividend of only $.06 per share, which would have resulted in a much lower initial yield.

The coffee retailer also provided guidance on future dividend payments, stating that the company will initially target a dividend payout range of 35 – 40% of net income. Wall Street consensus estimates call for $1.11 EPS in fiscal year 2010, so the initial dividend payout ratio will be 36%. However, Wall Street anticipates earnings will grow 13 – 14% in 2011 which could result in a nice dividend increase next year.

The dividend announcement doesn’t come as a huge surprise, as Starbucks had hinted in January that it was evaluating ways to return excess cash to their investors. In 2009, Starbucks’s free cash flow jumped to a record $943 million and they currently hold $1.36 billion in cash on their balance sheet. At their initial dividend level, the company will pay out less than $295 million each year in dividends.

Troy Alstead, Executive Vice President and Chief Financial Officer, commented, “We are confident in the overall financial strength of our business and the strong cash flow it continues to generate. Starbucks solid cash position and cash flow outlook enable the Company to invest in future profitable growth through stores, innovation and new platforms, while also returning cash to our shareholders through the initiation of a dividend and future share repurchases.”

Starbucks also authorized the repurchase of 15 million shares of common stock. This move is much more surprising than the dividend announcement given than Starbucks shares are currently trading at a 2-year high. This stock repurchase plan is also in addition to the 6.3 million shares that remain available for repurchase under previous authorizations.

Shares of Starbucks were up 1.5% to $25.80 in early morning trading on news of the dividend announcement. SBUX shares have gained nearly 12% since the beginning of 2010.

The first quarterly dividend will be payable on April 23, 2010 to shareholders of record as of April 7, 2010.

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