The Starbucks siren is still calling

Yesterday, I wrote about Nike (NKE) and all its troubles. And I’m sticking with that “enormous American brands that have fallen out of favor” category today.

Our new topic: Starbucks (SBUX).

As with Nike, its icon is every bit as famous as its name. That green woman with the wavy hair and the coy smile is practically synonymous with coffee in our modern minds.

Though if someone from past civilizations saw her likeness, they would probably know her as a two-tailed siren: a half-woman creature with the ability to lure travelers from their intended paths.

Certainly, Starbucks has worked its wiles on people around the world for decades. But that appeal slipped in the last few years, and it’s shown in the company’s quarterly reports.

When it comes to Nike, I ultimately concluded that I can’t count it out just yet. Its brand recognition and athlete affiliations give it a competitive edge that are hard – though not impossible – to dismiss, even with all of its corporate missteps.

Can the same thing be said for Starbucks?

That’s the question I aim to explore today.

Being a former Starbucks junkie myself, I've actually visited its original location at Seattle's Pike Place Market.

It’s a piece of American business history that’s practically a pilgrimage site. People go there to take pictures of themselves and tell all their friends where they were and what they bought.

What they may not recognize when they do is that the original Starbucks store they’re honoring was very different from the ones they recognize today. When Jerry Baldwin, Zev Siegl, and Gordon Bowker opened it in April 1971, the enterprise took up roughly 1,000 square feet of space. It required just one employee. And it sold whole-bean coffee, tea, and spices.

It wasn’t until Howard Schultz joined the operation in 1982 that things started changing. Or at least the seeds of change were sown.

Schultz traveled to Milan in 1983, where he discovered Italian espresso bars. Not only did they offer hot, freshly brewed coffee on demand, but the cafés also combined workplace appeal with welcoming space to chat with friends.

It was a “third place”: a perfect blend of house and office to Schultz.

Not so much to his bosses, however, who were then operating 17 stores. They were just fine with their approach. So Schultz left to start his own business…

Bought up Starbucks in 1987…

And turned the concept into a global powerhouse with more than 41,000 locations.

People didn’t care that it was more expensive because they weren’t just paying for coffee. They were paying for Starbucks: the drinks, the experience, and the community.

That's brand equity that made for quite the wide and profitable moat.

In fiscal-year 2010, Starbucks generated roughly $10.7 billion of revenue. By fiscal 2025, it was up to roughly $37.2 billion.

That's an 8.7% compound annual growth rate (CAGR) over 15 years, which is impressive for any company. But it’s even more so for one that’s established the way Starbucks is.

Another aspect I’ve long appreciated about Starbucks (especially as a shareholder myself) is its dividend, which it initiated in 2010. That was just $0.05 per share per quarter at the time. Yet it’s raised it every year since so that, by 2025, it was up to $0.62.

According to Starbucks’ math – which checks out with me – that’s 17.5% CAGR. Though this dividend growth recently slowed by a lot.

The coffee company was raising it in the high single digits to low double digits for years:

But last year, Starbucks raised it just 1.6% to $0.62.

That tracks when diluted earnings per share (EPS) was $3.58 in fiscal 2023… but roughly $1.63 in 2025. So its annualized $2.48 dividend exceeded its generally accepted accounting principles (GAAP) earnings.

I understand why. As sales softened, Starbucks invested heavily in its turnaround plan. But that doesn’t mean the imbalance is sustainable long-term.

Shorter-term, I think the dividend is fine since Starbucks is still a substantial cash-generating enterprise. But I am still watching CEO Brian Niccol’s moves closely.

So far, I’m impressed. Guided by his enormously successful tenure at Chipotle (CMG), he’s now implemented the “Back to Starbucks” strategy.

Like his customers, he recognizes that Starbucks has become too complicated. The menu is too busy. The mobile-order system is too congested. And the stores themselves are too unwelcoming, turning Schultz’ successful vision of meeting space upside down.

Niccol is therefore implementing simplified menus and more employees for faster service, which appears to be working.

Starbucks’ Q3 global comparable-store sales rose 7.9%, with a 4.2% increase in transactions and 3.5% higher average ticket. North American comps specifically increased 8.1%, with a 4.5% increase in transactions.

Non-GAAP operating margin, meanwhile, expanded 430 basis points (bps) to 14.4%. And non-GAAP EPS soared 70% to $0.85, allowing management to raise full-year guidance to $2.55–$2.65.

If Niccol can keep this up, more impressive and sustainable dividend growth should follow from here.

Being a dividend guy, I like Starbucks’ current trajectory. But that doesn’t mean I’m unaware of its growth potential as well.

Starbucks used to be a remarkable compounding machine, and I think it can be again – even if it takes a little time to get there.

The company said last month that it will close around 250 locations across North America, or about 1% of its 18,000+ stores here. It expects close to $300 million in restructuring charges as a result, complete with lowered net new global openings of about 440 stores for the year instead of its initial plans for 600–650.

That might seem like failure to some. But with all due respect, that’s short-term thinking on display.

Starbucks can use this culling to spring back into stronger sales growth in the numerous locations it retains. And that can more than make up for its current losses.

If it can keep up with the competition in the meantime, that is.

I’ve written recently about Dutch Bros (BROS) and the privately owned 7 Brew, for instance. Both are embracing alternative energized drinks and winning over younger consumers with a very non-Starbucks approach.

Rejecting Starbucks’ idea of a “third place” to sit down at, these coffee chains are catering to customers who want their coffee in the fastest, most convenient, customized form possible. Drive-thru and drive away: That’s the premise for their so-far successful operational model.

Then there’s McDonald’s (MCD) with its expanding McCafé offerings, and independent coffeehouses all over. In China, the latter operators are especially aggressive in their pricing and digital engagement.

So there’s plenty of risks for Starbucks to contend with.

All the same, it does seem like it’s turned an important corner. In which case, I’m left wondering about valuation…

Management is now targeting fiscal-year 2028 non-GAAP EPS of $3.35–$4.00, along with 13.5%–15% operating margins and 5% revenue growth or higher.

I therefore see three basic possibilities:

Shares were recently trading just below $95. So the base case offers mere modest upside, especially considering Starbucks’ current dividend and yield of around 2.6%.

Frankly, as with my Nike conclusion yesterday, I want a better price for the risk-reward assessment I’ve laid out here.

Both companies are far from worthless despite their major missteps in recent years. And they both command extensive, impressive, and powerful empires.

But as my readers know, I don't buy companies simply because they have moats. I want quality, durability, predictable cash flows, and dividends…

All tied up with a margin of safety bow.

That’s why Starbucks is on my watchlist, not my buy list. Though I’ll let you know as soon as that changes for the better.

Happy SWAN investing!

Brad Thomas
Editor, Wide Moat Research