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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

March 24, 2010 at 10:00 AM

Starbucks dividend should be good news, if the barbarians can be kept from the espresso gates

With its announcement of a 10-cents-per-share dividend, Starbucks would seem to have crossed the Rubicon from being a sweet young “growth” stock to accepting its position as a mature, even a “value,” stock.

In the American economy that once existed, this would be a good thing. Shareholders accepted their responsibility as owners, not temporary squatters awaiting the next opportunity to sell or enjoy the quick profits from a job-destroying merger. They invested for the long haul and played a critical role in ensuring good corporate governance. Dividends were their reward. Companies were allowed a longer-term view, reinvesting in productive activity, research and sharing wealth with workers.

Not coincidentally, this state of affairs, which existed from the 1940s through the 1970s, built the greatest economy in history based on a universe of stable, well-run and growing companies. Scandals were rare and panics nonexistent. Bad deals (think Penn Central) were quickly punished and cleansed from the system. Income inequality was low. Seattle benefited from companies that stayed and grew, from Boeing to Microsoft, rather than being started and quickly sold.

Today’s financialized, speculative-driven economy is very different. Starbucks decision is inevitable and prudent. It may take off some of the heat to show spectacular profit margins. But not by much. Shares rose modestly today, but probably driven by hot money — the huge pool of cheap dollars out there — going in to get the dividend, then shoot out again.

Being seen by the market as a mature stock does have benefits, chief among them a proven record of success and stability. Here, Starbucks will have to manage its transition with the grace of a diver making the turn. Its comeback has been largely based on defensive measures, such as store closings and layoffs. Successful defense in a historic downturn is worth celebrating. But can Starbucks say to the investment community that it has the track record of, say, Procter & Gamble or Johnson and Johnson? No.

Starbucks officials will fight the term “value stock” and well they should. Value stocks were once considered to be bargains on good companies, based on their fundamentals, as opposed to growth stocks, where the prices may have little relation to real current earnings. Warren Buffett is a classic investor in this mold. He didn’t buy Burlington Northern Santa Fe to strip and flip or because of a dot-com fever, but because he believed in the long-term value of the railroad.

Unfortunately, the term can also imply an undervalued stock, a “dog of the Dow,” inviting all sorts of investor pressure, right down to a sale or merger. Starbucks is no dog. But the world of hedge funds, lightning-fast trading strategies, hot money and investment bankers wants a quick profit, not to build or sustain lasting companies, whatever their success.

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