Starbucks Corporation's Dividend Could Double in Just 4 Years

By Markets Fool.com

Starbucks' (NASDAQ: SBUX) dividend may not get the same recognition as companies known for their dividends. After all, Starbucks' 1.8% dividend yield is well below the 2.1% average dividend yield of stocks in the S&P 500. But dividend investors shouldn't overlook Starbucks just because it falls short in this one area. The coffee giant makes up for its lacking dividend yield with significant dividend growth prospects. Indeed, Starbucks dividend could double in just four years.

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Starbucks' recent dividend growth

Starbucks' dividend has been on a tear. During the past five years, the coffee giant has increased its dividend at an average annualized rate of 24.9%. And this dividend growth hasn't slowed recently. The company announced in November it would increase its dividend this year by 25%, keeping up the dividend's extraordinary growth.

Starbucks' strong dividend growth during this period has been enabled by the company's equally impressive earnings-per-share growth. During the past five years, Starbucks' EPS has increased at an impressive average rate of 18.6%, even as Starbucks' capital spending during this period increased at about 22% annually. Further, like its recent dividend hike, the company's EPS growth remains high today. In the company's most recent quarter, EPS increased 26% year over year.

Where is Starbucks' dividend headed next?

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Looking forward, there's good reason to expect Starbucks' dividend to continue increasing at rapid rates.

Perhaps the most notable reason to expect robust dividend growth in the coming years is the company's low payout ratio, or dividend payments as a percentage of earnings. Currently, Starbucks' payout ratio is just 42%. In other words, only 42% of Starbucks annual earnings is currently going toward dividend payments. This leaves plenty of room for dividend increases in the future.

Starbucks' room for dividend growth is just as evident by looking at the company's dividends paid in the trailing 12 months compared with its free cash flow, or cash from operations less capital expenditures, during this same period. Of Starbucks' $3.1 billion in free cash flow, the coffee retailer paid out just $1.2 billion in dividends.

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But more than Starbucks' current financial situation makes a case for expected dividend growth. Investors should also note management's forecast for earnings growth over the next five years. In the company's recently updated five-year plan, management said it expected EPS to increase between 15% and 20% annually during the next five years. And analysts seem to -- almost -- agree; the consensus estimate for Starbucks' average annualized growth during this period is 15.7%, or the low end of Starbucks' guidance range.

Combing Starbucks' impressive dividend performance during the past five years with good reasons for this growth to continue, it would arguably be conservative to forecast Starbucks' dividend to increase at an average rate of about 20% during the next five years. Highlighting just how much of a difference dividend growth can make over time, such a heady growth rate would essentially double Starbucks' dividend in less than four years.

So Starbucks' 1.8% dividend yield may be unimpressive today. But income investors who buy today and hold for the long haul will probably see their annual dividend payments from Starbucks increase at rapid rates.

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Daniel Sparks has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.