Let's welcome Meta Platforms (META 0.43%) to the dividend club. Last week, the company announced that it's initiating a quarterly dividend for the first time.
The news was warmly received by investors. So was Meta's overall fourth-quarter update: Shares skyrocketed more than 20% on the heels of the company's earnings release. Meta's dividend is emphatically not a reason to buy the stock -- but there's something that is.
Dividend, shmividend
There were multiple articles published after Meta's Q1 update last week with headlines trumpeting that CEO Mark Zuckerberg will receive nearly $700 million per year from the company's new dividend. Those headlines were correct. However, they can also lead you to think that Meta's dividend is better than it actually is.
Zuckerberg will make a boatload of dividend income because he owns a boatload of Meta Platforms shares. Meta's dividend payout isn't anything to get excited about, though.
The company's board of directors declared a cash dividend of $0.50 per share. On an annualized basis, that translates to a dividend of $2 and a yield of roughly 0.44%.
This puts Meta's dividend yield in the bottom 10% of all dividend stocks. Meta also comes in next to last among its megacap tech peers with dividend programs. Only Nvidia has a lower dividend yield (a measly 0.023%).
Here's the real reason to buy Meta stock
If you're looking for a compelling reason to buy Meta stock, the dividend just ain't it. There is a great reason to buy the stock, though: Meta offers investors a highly attractive risk-reward proposition.
Let's first address the company's risks. Competition from other social media platforms certainly ranks high on the list. So does the potential threat from regulatory investigations. Meta faces risks with its investments in developing new technologies as well.
However, even with rivals such as TikTok gaining ground, Meta's social media platforms still attracted a whopping 3.19 billion people on average every day in 2023's Q4, up from the previous quarter. I'm not saying that the company shouldn't take its competitors seriously, but I don't see anything to get overly concerned about on this front.
Perhaps Meta could get dinged with a hefty fine by regulators looking into potential antitrust matters and privacy issues. I'd be shocked, though, if the outcome is more severe than that.
That leads us to Meta's investments in developing new technologies. Although there is certainly a risk that the company could fail, my view is that the likelihood of some measure of success is even greater.
Zuckerberg revealed in the Q1 conference call that Meta is actively working on "building full general intelligence" -- his description of what most AI experts call artificial general intelligence (AGI). I predict that Meta's AGI efforts will pay off big-time.
He also reaffirmed Meta's commitment to developing the metaverse. The company still expects that it might take a decade or so to achieve its metaverse vision. However, Zuckerberg stated that he thinks that smart glasses with AI assistants could be "the killer app" with a big market that arrives even earlier.
What about valuation?
Some investors are leery of the sky-high valuations of the so-called "Magnificent Seven" stocks. Is valuation a problem for Meta? I don't think so.
Sure, Meta's shares trade at over 27.5 times forward earnings. That's certainly steep at first glance. However, it's important to factor in the company's growth prospects. Meta's price-to-earnings-to-growth (PEG) ratio (using analysts' 5-year growth projections) is only 1.07 times. That reflects an attractive valuation.
Granted, those growth estimates could turn out to be wrong. If you're looking for a good reason to buy Meta stock, though, valuation shouldn't dissuade you from doing so.
