Many companies paid dividends in 20YY and these payouts were attributed to the large cash build-up...

Many companies paid dividends in 20YY and these payouts were attributed to the large cash build-up relative to the market values of many firms. Starbucks was an example of this phenomenon. After two years of poor performance and store closings, in the first quarter of 20YY, Starbucks announced its first dividend payout. They announced not only a 10 cent dividend per share but also announced they would begin to buy back their own shares. Most analysts believe Starbucks has passed the fast-growth stage and are entering a maturity period. What is Starbucks share repurchase and enhanced dividend saying about its future prospects?

Expert Solution

Starbucks share repurchase and enhanced dividend indicates that the company wants to presently reward its shareholders and give them back as much as possible. The company expects the future to be promising and its recent deal with Nestle is expected to be accretive to its earnings. Thus the company’s decision with regards to share repurchase and enhanced dividend is being guided by its positive outlook for the future and that alliances like that with Nestle will enhance its business prospects in future and give its earnings, top-line and bottom-line further traction. Further share repurchase will also help Starbucks to shore up its financial ratios like earnings per share (EPS).

Thus we can say that future prospects of Starbucks does appear bright and the recent decisions of the company to pay increased dividends and buyback its shares is just to reward the shareholders after two years of dismal financial performance. Analysts are most probably wrong in saying that Starbucks is entering a maturity period and deals like the Nestle deal will further augment and boost the company’s growth and financial performance in future, thus ensuring that high growth continues for some time in future.

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