Please ensure Javascript is enabled for purposes of website accessibility

It's Time for First Solar to Start Paying a Dividend

By Travis Hoium - Dec 10, 2019 at 9:35AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The solar panel manufacturer has more cash on its balance sheet than it needs, and it the stockpile looks set to grow.

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 (FSLR -1.05%) -- which has an abundance of cash, but is stalled on the growth front -- should begin returning cash to shareholders.

Large solar farm in the desert.

Image source: First Solar.

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. 

FSLR Cash from Operations (TTM) Chart

FSLR Cash from Operations (TTM) data by YCharts

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. 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

First Solar, Inc. Stock Quote
First Solar, Inc.
$65.77 (-1.05%) $0.70

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/22/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.