We recently compiled a list of the 7 Best Restaurant Dividend Stocks to Buy. In this article, we are going to take a look at where Starbucks Corporation (NASDAQ:SBUX) stands against the other restaurant dividend stocks.
The restaurant industry is facing challenges this year due to shifting customer preferences. The 2020 pandemic had already prompted a move towards digital solutions, which were initially thought to be a long-term fix. However, the landscape continues to evolve, and now consumers are shifting their preferences again. Customers are being more cautious when dining out, opting for fewer items, cutting back on alcohol, and favoring value-menu options over premium ones. People are now prioritizing grocery shopping over dining at quick-service restaurants due to tighter budgets. As consumers become less inclined to spend extravagantly on eating out, quick-service restaurants are under pressure to maintain performance. To attract budget-conscious diners, brands are likely to increase promotional offers. Overall, same-store sales and customer traffic are declining as high prices and reduced savings take their toll on consumer spending. The Dow Jones U.S. Restaurants & Bars Index is down by nearly 3% this year so far.
High prices aren’t the only issue when it comes to dining out. Food delivery apps have reacted to new wage increase mandates for gig workers by raising their fees. This has led to frustrated customers, a drop in restaurant orders, and a decrease in delivery drivers. A Wall Street Journal report highlights that in cities like Seattle, Uber Eats orders fell by 45% In the first quarter of 2024 compared to the same time last year due to these higher fees. This decline in consumer orders means restaurants have fewer deliveries to make, and drivers have fewer jobs, impacting the entire delivery ecosystem. Experts believe it’s too soon to determine the long-term effects of the wage increase on fast-food restaurants and whether it will result in significant layoffs or closures. Historically, wage hikes haven’t always led to job losses. For instance, a University of California, Berkeley study found that when California and New York raised their minimum wage to $15, nearly doubling the federal rate of $7.25 per hour, job growth continued.
Despite challenges, the restaurant industry isn’t entirely faltering this year. RSM Global reports that, while demand might be softer than expected, retail sales are still growing, driven by increased real income and stronger consumer sentiment. The report further mentioned that in 2024, the restaurant sector is expected to see annual sales growth of 2% to 3%, in line with the inflation rate. To succeed in this competitive environment, businesses need to focus on automation and maintaining robust operating margins for scalability. Integrating smart technology is crucial to meet rising consumer expectations and boost operational efficiency. Retailers and restaurants should strategically invest in these areas to capitalize on growing consumer spending.
Given the optimistic forecast and shifting investment trends, investing in restaurant stocks, particularly those offering dividends, seems like a prudent choice. The consumer discretionary sector, which includes restaurants, saw its annual dividends increase to $106.8 billion in 2023, up from $84.6 billion in 2022, according to a report by Janus Henderson. In this article, we will take a look at some of the best dividend stocks from the restaurant industry.
Our Methodology:
For this article, we sifted through ETFs and screeners to identify dividend-paying companies that operate in the restaurant industry. These companies typically own and operate various types of restaurants, including fast-food chains, casual dining establishments, fine-dining restaurants, and quick-service restaurants. After careful consideration, we selected 10 stocks from this list based on their popularity among hedge fund investors. We then arranged these stocks in ascending order of hedge fund sentiment.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A barista pouring a freshly brewed cup of coffee from a high-end espresso machine.
Starbucks Corporation (NASDAQ:SBUX)
Number of Hedge Fund Holders: 69
Although it might not align with the classic notion of a full-service restaurant, Starbucks Corporation (NASDAQ:SBUX) manages an extensive network of coffeehouses around the globe, offering a range of drinks and food items for customers. The company reported a strong cash position in its recently-announced fiscal Q3 2024 earnings. Through the first three quarters of the year, it generated over $4.5 billion in operating cash flow, up from $4.06 billion in the same period last year. This solid cash generation allowed the company to pay dividends for 57 consecutive quarters, with a compound annual growth rate of 20% during this period. Moreover, it has raised its payouts for 13 years in a row. It currently offers a quarterly dividend of $0.57 per share and has a dividend yield of 3.03%, as of August 6.
Since the start of 2024, Starbucks Corporation (NASDAQ:SBUX) is down by over 19.5%. The stock was performing well compared to the market until the pandemic hit, which led to a sharp decline in its share price that hasn’t fully recovered. This may be attributed to the company’s difficulty in adjusting to changing trends, as well as high prices driven by inflation, which are driving customers away. Diamond Hill Capital also shed light on this aspect of SBUX in its Q2 2024 investor letter. Here is what the firm has to say:
“Starbucks Corporation (NASDAQ:SBUX) is the global leader in the coffee industry. Given its significant scale, we believe Starbucks can maintain its average ticket growth and drive decent traffic growth, which should allow for some margin expansion. While macroeconomic and competitive pressures remain intense in China, the country accounts for a minimal percentage of today’s earnings, and we believe the current valuation embeds little to no contribution from China over the long term, which we view as too cynical. As the share price declined recently amid near-term concerns surrounding store sales in North America and China, we capitalized on what we considered an attractive entry point.”
Starbucks Corporation (NASDAQ:SBUX) remained popular among elite funds at the end of Q1 2024, with hedge fund positions growing to 69, from 59 in the previous quarter, as per Insider Monkey’s database. The stakes held by these hedge funds have a collective value of nearly $2.7 billion. Among these hedge funds, Fisher Asset Management was the company’s leading stakeholder in Q1.
Overall SBUX ranks 1st on our list of the best restaurant dividend stocks to buy. You can visit 7 Best Restaurant Dividend Stocks to Buy to see the other restaurant dividend stocks that are on hedge funds’ radar. While we acknowledge the potential of SBUX as an investment, our conviction lies in the belief that some deeply undervalued dividend stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued dividend stock that is more promising than SBUX but that trades at less than 7 times its earnings and yields nearly 10%, check out our report about the dirt cheap dividend stock.
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Disclosure: None. This article is originally published at Insider Monkey.