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The Best Dividend Stock in E-Commerce

By Andrew Tonner - Apr 8, 2017 at 6:21PM

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Perhaps the only pure-play e-commerce name to pay a dividend, MercadoLibre is an income investment, but that's not the reason to buy this Latin American powerhouse.

For most investors, the term "e-commerce stock" probably isn't closely associated with dividends, a hallmark of staid, mature companies. E-commerce transactions accounted for just 8.3% of total retail sales in the U.S. in the fourth quarter of 2016. With e-commerce as a business trend so early in its evolution, even established players like (NASDAQ: AMZN) and eBay (NASDAQ: EBAY) focus on reinvesting excess cash flows into growth-driving projects, rather than paying out dividends to shareholders. There is, however, one exception to this rule.

Though it flies under many investors' radars, Latin American e-commerce star MercadoLibre (MELI 5.84%) has paid out a dividend for several years. As such, MercadoLibre earns its place as the best dividend stock in e-commerce because it is essentially the only dividend stock in e-commerce. However, as you will see, its dividend is just one of the many reasons investors should love MercadoLibre.

Keyboard with a key with the outline of a shopping cart painted on it highlighted.

Image source: Getty Images.

Meet MercadoLibre

MercadoLibre is the largest e-commerce company in Latin America. Its website operates in 19 countries and is the most popular in at least 10 countries in Central and South America, including the bulk of the region's largest economies (such as Brazil, Mexico, Argentina, Colombia, Venezuela, and Chile).

In terms of its product offerings, MercadoLibre can be thought of as equal parts Amazon and eBay; it had a strategic alliance with the latter for many years. Its core e-commerce platform operates as a marketplace like eBay's, where individuals and retailers can post items for sale to end users, and unlike Amazon's, where the company owns the majority of the goods it sells. MercadoLibre also provides its own payment-processing system -- similar to PayPal, which was spun out from eBay -- and its own shipping and order-fulfillment services, taking a page from Amazon.

MercadoLibre has also started selling sponsored listings in its marketplace business to third-party participants. It recently launched a cloud-based software platform for its enterprise users. MercadoLibre seems to have made many of the same savvy moves as its larger rivals, which bodes well for the company and its mission to dominate the fast-growing Latin American e-commerce market.

MercadoLibre's incredible opportunity

As mentioned earlier, e-commerce still accounts for a small fraction of retail sales in places like the U.S. with relatively mature online marketplaces. Given that e-commerce adoption in Latin America still lies years behind, this makes MercadoLibre's long-term growth potential all the more exciting.

According to researcher eMarketer, total retail sales in Latin America topped $1.9 trillion last year. However, e-commerce sales accounted for just 2.6% of that figure, or about $49 billion. Contrasted with MercadoLibre's own financial footprint, it becomes clear just how compelling the company's growth opportunity could be.

In 2016, MercadoLibre saw $8 billion in retail sales ("gross merchandise volume") on its platform, from which it generated $844 million in revenue. Seen through this lens, MercadoLibre remains a bit player in the region's overall retail space. E-commerce should continue to gain market share, and as the leader in the region, MercadoLibre figures to be the primary beneficiary of this trend.

You might have noticed that this article has yet to touch on its original investing angle: dividends. Apologies for that, but income-producing capacity remains a very small part of MercadoLibre's investing thesis. The company only began paying its dividend in 2011. It has done a nice job growing its payouts over that period, increasing quarterly payments from $0.08 per share in 2011 to its current $0.15 per share. However, its shares yield just 0.3%, far below the S&P 500's current yield of 1.9%.

In the final analysis, there are plenty of reasons to own MercadoLibre stock. However, the fact that it pays a dividend should sit fairly far down the list. MercadoLibre remains first and foremost a revenue growth story, and is a fantastic way to participate in the worldwide rise of e-commerce for years to come.

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