This Dividend-Paying Growth Stock Just Blasted to a 52-Week High. Is It Still a Buy Now?

Starbucks (NASDAQ: SBUX) shares soared 8.1% last Wednesday in response to its first-quarter fiscal 2025 results and management commentary on the earnings call. With the stock at its highest level since April 2023, investors may be wondering if Starbucks has room to run, or if the surge has gone too far.

Here's my take on where Starbucks stands, where it's going, and whether the dividend-paying growth stock is worth buying now.

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From big drops to big pops

Starbucks investors have endured a wild ride over the last five years that included far fewer ups than downs.

The COVID-19 pandemic took a sledgehammer to Starbucks' results. It took years for the company to recover. Then, it got hit hard by inflation and an economic slowdown in China. Throw in multiple management shakeups and a lack of clear direction, and it's easy to see why the investment thesis for Starbucks was challenged.

Then, everything changed in August, when former Chipotle Mexican Grill CEO Brian Niccol took the reins as the new top brass at Starbucks. Starbucks shares rose 21% in August on the news alone, but there was still work to be done.

It's now a few months into Niccol's term, and the stock price has moved even higher after that August gain. In fact, Starbucks is up a staggering 39% since the start of August.

A turnaround in the making

Niccol has now been on two Starbucks earnings calls, and if you're interested in Starbucks stock, both calls are definitely worth a listen.

What stands out is a renewed purpose and direction for the company. Niccol and his team are bringing back core ingredients that were instrumental in Starbucks' past success, while also identifying what led to the deterioration in the employee and customer experience.

On its fourth-quarter fiscal 2024 earnings call, management outlined several changes, including better handling of peak hours through staff support and mobile order pauses, pausing price increases, eliminating non-dairy milk upcharges, and cutting back on an overly complex menu.

On the recent earnings call, Starbucks built upon its strategic initiatives by announcing a 30% reduction in beverage and food selections to simplify its menu and make it easier for employees to fill orders.

Niccol's approach to turning Starbucks around is unique because it is highly sensitive to the employee experience. Over the last few years, Starbucks has been in the spotlight for employee dissatisfaction and union-led strikes. By giving employees better equipment and simpler orders, and managing order volume by limiting mobile ordering during peak inflows, it stands to reason that the Starbucks customer experience would also improve with lower wait times.

And if Starbucks is able to fulfill more orders, it could also limit dependence on price increases.

Uncertainties remain

Starbucks is heading in the right direction, but assuming the company's turnaround is complete would be a mistake.

For starters, Starbucks is still suspending its guidance, which keeps investors in the dark. However, management did say that second-quarter earnings will be the lowest quarter of the year, due to seasonality and the effect of organizational restructuring. But the second half of the fiscal year should see sequential and year-over-year improvement.

The first quarter's results were fairly poor. Comparable sales declined by 4%, and consolidated net revenue was flat year over year. Investors shouldn't expect the full effects of Starbucks' strategic changes to be felt in the next few quarters.

Investing in turnaround stories can be tricky. Starbucks endured a period of widespread doubt and investor pessimism. But now, investors seem to believe the turnaround is the real deal, even though Starbucks has yet to deliver the results that would indicate so.

In terms of valuation, Starbucks is far from cheap, sporting a price-to-earnings (P/E) ratio of 35.3 and a forward P/E of 32.8. Again, these valuation metrics should be taken lightly, since the near-term results don't factor in a lot of growth. But still, Starbucks is no longer the dirt cheap stock it was six months ago. Starbucks is difficult to value right now. It remains to be seen if the new strategies will translate to sustained bottom-line growth.

Another question mark is China, which used to be viewed as the company's fastest-growing region. In fact, Starbucks founder and former CEO, Howard Schultz, thought that China could potentially surpass the U.S. in store count. As of the quarter ended Dec. 29, 2024, Starbucks had 17,049 stores in the U.S. compared to 7,685 in China, but $6.6 billion revenue from the U.S. compared to just $743.6 million in China.

A quality dividend stock worth adding to a watchlist

The buy case for Starbucks still centers on its turnaround, but the valuation is more expensive. Buying the stock now is a bet on the success of management's efforts, rather than on the company simply finding its footing.

In the meantime, Starbucks pays a growing dividend -- providing an incentive to hold the stock through periods of uncertainty. The company has raised its dividend at a compound annual growth rate of around 20% for 14 consecutive years. However, investors should expect future raises to be in the mid- to high single-digit percentage range. With a yield of 2.2%, Starbucks provides more passive income than the S&P 500, which yields 1.2%.

The higher a stock rises while earnings remain beaten down, the more pressure is put on the story playing out. Starbucks' new management team has painted a rosy outlook for the company's future. If it comes true, investors buying the stock -- even at its elevated price -- could benefit. But given the expensive valuation, most investors may be better off taking a wait-and-see approach to Starbucks until the results catch up with expectations.

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Daniel Foelber has positions in Starbucks. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends the following options: short March 2025 $58 calls on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.