Starbucks suspends stock buybacks: is it time to sell the stock?
Immediately after becoming the interim CEO of Starbucks (SBUX -1.56%), Howard Schultz suspended the company’s share buyback program. “This decision will allow us to invest more in our people and our stores – the only way to create long-term value for all stakeholders,” he said in a press release.
The ubiquitous coffeehouse giant just posted its all-time best result for a second fiscal quarter — $7.6 billion — so the move likely surprised many investors. Despite a mostly positive quarter, Schultz understands that now is not the time for Starbucks to rest on its laurels, especially in an uncertain economic environment.
Rather, the business must invest in building a foundation that will allow it to continue to be successful. That this seems to be his strategy is a good reason to be optimistic about the title.
Starbucks is playing the long game
In the five years from its 2017 fiscal year to its 2021 fiscal year, Starbucks has reduced its number of outstanding shares by 20%. It has also increased its dividend payouts in each of the past 10 years. In the first two quarters of fiscal 2022, Starbucks repurchased $4 billion in stock and paid $1.1 billion in dividends. The company will continue to pay dividends.
The board of directors is still authorized to repurchase an additional 52.6 million shares. But QFrankly, management thinks there are better uses for their money.. The management team estimates that the share buyback yields a return of 10%. “With Starbucks’ hoard of global assets, a 10% return isn’t good enough for me,” Schultz said of the fiscal year. Call for Q2 results.
Instead, Starbucks needs to allocate capital to more productive uses. Investing in employee training, increasing salaries, upgrading store equipment and developing a communication tool with partners are high on the list. And given the continued push for unionization at its cafes, doing more to take care of its employees should be Starbucks’ top priority right now. This will benefit the business for years to come by strengthening the company’s position as a leader Restaurant chain where people like to work.
Management says it plans to invest more in digital capabilities, which is the most profitable opportunity available. And as part of an effort to accelerate new store growth, 90% of its new locations will have drive-thru, a sign that Starbucks is adjusting to changing consumer preferences. In fact, 75% of orders at company-operated stores in the U.S. last quarter came from drive-thru, mobile ordering or delivery. Strengthening its physical and digital infrastructure to better meet customer expectations will be crucial.
“We are confident that the investments in our partners, our stores and our brand that we announced today will generate returns above historical levels and accelerate our long-term growth,” Chief Financial Officer Rachel Ruggeri said at the conference call. telephone with analysts. Based on financial terms alone, redirecting capital away from share buybacks and back into the business is the smart move.
While this may initially seem like a defensive move that involves some weakness in Starbucks’ financial position, I strongly believe this is the right strategy to increase long-term company value. Management sees record demand in the United States and wants to position the company to handle its next stage of growth.
For investors, now is not the time to sell stocks. Starbucks’ winning days are far from over.