It's an age-old business question with no simple answer: When should a company start paying a dividend?
While every business's leaders will have their own ideas about when their company should initiate a payout, there are some indicators that are pretty easy to spot. When top-line growth slows and there are fewer places to invest capital in growth, and when cash generation has become so strong there's simply an excess of funds on the balance sheet, it's time to look at a dividend.
Based on that, I think that First Solar (NASDAQ:FSLR) -- which has an abundance of cash, but is stalled on the growth front -- should begin returning cash to shareholders.
First Solar's stagnant business
Though it grew rapidly from its 1999 founding through 2010, First Solar has stagnated over the past decade. A combination of falling solar panel prices and a reduced emphasis on solar farm development has left revenue about where it was in 2012. Revenue in 2012 was $3.37 billion and since then revenue has fluctuated between $2.9 billion and $3.6 billion (revenue of $2.2 billion in 2018 was due to manufacturing upgrades). This year, expected revenue of $3.5 billion to $3.7 billion will be at the top end of the range of the last decade but First Solar certainly isn't a growth stock any longer.
The problem in solar energy has always been that price deflation offsets volume increases over time. Sure, global solar installations are growing double digits each year, but costs are coming down just as fast, so overall a business like First Solar's won't see much revenue growth over time.
Cash is the least of First Solar's worries
You can see below that First Solar has been doing a fairly good job of generating cash from operations -- except during the past year, when it has been upgrading manufacturing capacity. But it has been cash-flow positive most of the decade, and its cash and short-term investments total currently stands at $1.5 billion and is expected to be in the $1.7 billion to $1.9 billion range at the end of the year, or $17.16 per share at the midpoint.
That's a huge stockpile of cash for a company that's now focused almost entirely on manufacturing. If it needed cash on the balance sheet to pay for solar farm development, that would be a different story -- but it doesn't. And if free cash flow begins to rise as manufacturing upgrades are completed, the business should generate a steady stream of cash and earnings in 2020.
First Solar has taken the cautious approach
There's a good reason why First Solar has been cautious with its finances. Some renewable energy companies have gotten into trouble, loaded themselves down with too much debt, and ultimately landed in bankruptcy. First Solar, by contrast, has the flexibility to invest in new capacity or capabilities, and its nest egg is there as a cushion if conditions get worse in the industry.
But the days of fast disruption from new technologies and Chinese companies building scale appear to be over and the solar industry is more stable than it's been in two decades. The need to hold a war chest of cash isn't as high as it used to be and First Solar can operate its business with far less cash on the balance sheet. In a fairly slow growth solar market where technology changes are slow, First Solar should be able to hold market share with incremental manufacturing upgrades to existing manufacturing plants. That doesn't require billions in cash, but is part of normal capital spending.
With positive cash flow from the business and nearly $2 billion in cash on the balance sheet, a modest dividend for shareholders would barely eat into First Solar's cash reserves and I think it's time to start giving cash back to shareholders.