Social media giant Meta Platforms (META 0.43%) surprised Wall Street last week when it announced in its fourth-quarter financial report that it was initiating a quarterly dividend. A dividend is a sign of a maturing business that doesn't need to plow as much of its profits back into the company as it used to, so it instead shares them with investors.
But don't sleep on Meta because, as Q4 earnings admirably demonstrated, growth is still going strong. Now, dividend-focused investors are pondering Meta for the first time, figuring out how much dividend growth they might expect moving forward.
While Meta has shown it still loves buying back its stock, the company could have more dividend potential than most you'll find on Wall Street.
Here is what you need to know.
Meta is an embarrassment ... of riches
Social media is a remarkably lucrative business. Aside from servers and overhead, a social network is primarily intellectual property. Meta also benefits from billions of users interacting on its various apps (Facebook, Instagram, Messenger, Threads, and WhatsApp), generating mountains of first-party data that arguably only Apple and Alphabet can even compare to.
It then uses that data to help it make billions of dollars from businesses around the globe looking to use that data to more effectively place their advertising in its various social media platforms. The sheer size of Meta's ad business is staggering. The company ended 2023 with $135 billion in sales and $43 billion of free cash flow. A business that converts nearly a third of its revenue to cash flow is terrific, but then consider that Meta spent $28 billion last year on business investments. Much of that went to Reality Labs, which hasn't made any profits yet!
In other words, had Meta wanted to, it could probably get its cash flow closer to half of revenue, which would have been a staggering $60-something billion. Meta's 2024 business investments are guided to increase to as high as $37 billion, and Meta still decided to throw some cash to shareholders.
Image source: Getty Images.
It is a remarkable business with seemingly more cash than it knows what to do with.
Assessing Meta's dividend potential
Companies that generate tons of cash flow generally make great dividend stocks, so Meta Platforms has high-level dividend potential if it leans into growing its payout over the coming years. Meta declared a quarterly dividend of $0.50 per share. That yields just 0.4%, so income-dependent investors shouldn't expect a lot from it initially. Also, investors should understand that the yield is so low, in part, because the stock price is so inflated at the moment.
Like most low dividend yields, the exciting part is how much a company could raise its dividend over time. Meta's dividend will cost it $2 per share in 2024, which, based on the number of shares, will total $5.26 billion annually. That's a dividend payout ratio of only 12%. Investors could potentially get double-digit percentage dividend growth for years. However, it's best to keep expectations conservative until Meta shows how willing it is to raise the dividend from year to year.
Something else to factor in is that Meta is also heavily devoted to repurchasing its stock right now and has lowered its share count by 10% over the past three years. Management announced an additional $50 billion in planned stock buybacks in 2024, on top of the $31 billion in buybacks the board had already approved in its existing program.
Should dividend investors buy Meta stock?
Meta exhibited strong growth in Q4, with a 25% bump in revenue over last year's final quarter. While the dividend signals that management wants to trickle more of Meta's profits to shareholders, the company will likely remain growth-oriented with ongoing multibillion-dollar investments into artificial intelligence and the metaverse.
Dividend investors who demand at least some sort of payout can do very well by buying this proven compounder and letting a fantastic business generate billions in annual profits, buy back mountains of stock, and slowly build on a dividend that could be much bigger someday. Meta might not be for you if you want a high yield.
Despite Wall Street gobbling up shares after Meta's strong earnings report, the stock still trades at a reasonable 21 times 2024 earnings estimates. Meta has risen fivefold since October 2022, yet somehow, its price tag still looks appealing.
