The technology sector gave income-seeking investors a reason to cheer recently. Meta Platforms (META +1.81%) is finally putting risky growth initiatives like the Metaverse on a back burner to focus on generating profits that it will distribute as a quarterly dividend.
With billions of members who look at dozens of ads every day, Meta's application family is a cash-generating machine. That's an important feature for income-seeking investors, but it might not be enough.
NASDAQ: META
Key Data Points
What Meta Platforms' shiny new dividend won't do
Investors hoping they can throw a big chunk of cash at the parent company of Facebook and Instagram then sit back and live off the dividend payments will probably need a larger upfront investment than they expect. Meta set its new quarterly dividend at just $0.50 per share.
Shares of Meta shot up about 20% to $474.87 in response to the company's fourth-quarter earnings call. At its newly inflated price, the stock offers a minuscule 0.4% yield or just $4.21 annually for every $1,000 invested.
What Meta's new dividend could do
Shares of Meta aren't appropriate for income-seeking investors who are nearing retirement. Those of you with plenty of time to let its payout expand, though, might want to consider adding this cash machine to a long-term portfolio.
Meta's payout will start small, but it could grow by leaps and bounds in the years ahead. The company generated $43.9 billion in free cash flow over the past year but committed a little less than $5.1 billion annually to its new dividend program.
Dividend payments aren't the only way Meta Platforms treats its shareholders. The company has completed enough buybacks to lower its outstanding share count by 10.26% over the past three years.
META Shares Outstanding data by YCharts.
The lower share count allowed earnings per share to rise 27.5% over the past three years even though net income increased just 15.9% over the same time frame.
Last year, Meta returned $20 billion to shareholders in the form of buybacks, and there will be a lot more to come. The company finished 2023 with $30.9 billion set aside for buybacks and recently committed an additional $50 billion.
With $80.9 billion committed to reducing its outstanding share count, Meta should be able to raise its dividend payout at a rate that significantly exceeds its pace of net-income growth in the years ahead.
Powerful network effects
Meta Platforms is a good stock to own over the long run because it has a powerful competitive advantage that allows it to consistently record outsized profits. Meta's network effects led to a stunning 28.7% return on equity over the past 12 months. In early 2023, this figure sank to its lowest level since 2016, but it only fell to about 17%, which is still extremely profitable.
META Return on Equity data by YCharts.
If you're like me, you find algorithmic recommendations so off-putting that you rarely look at Facebook. At the same time, though, deleting your Meta accounts probably isn't an option. After all, how else would you find out about all the local events you'll probably never attend? What if you want to list something on Facebook Marketplace, organize an event of your own, or market a new podcast?
A smart buy now?
At recent prices, you can buy Meta shares for 23.4 times forward-earnings expectations. That's not bad for a company that grew earnings 121% over the past five years. If the company repeats its past performance, folks who buy at recent prices will come out miles ahead even before they count up all the dividend payments they'll receive.
Repeating past-profit growth could be a bigger challenge than investors anticipate. With nearly half the global population already showing up as monthly active users, it's only a matter of time before the growth of Meta's user base begins to stagnate. In Q4, Facebook, Meta's oldest application, grew monthly active users by just 3% year over year.
User growth has become so disappointing that Meta will stop reporting most of the user-growth metrics that dazzled investors in the past. Instead, it will begin focusing on year-to-year changes in ad impressions and average prices per ad.
While its user base will most likely stagnate in the years ahead, prices per ad outside of the U.S. are relatively low. A maturing international market for digital advertisements could allow Meta to continue growing profits by a double-digit annual percentage in the coming decade. Adding this stock to a diversified portfolio now despite its somewhat lofty valuation looks like a smart move for most investors.
