Meta Platforms' (META 0.57%) new $0.50 per-share dividend isn't going to turn any heads among investors seeking big yields. What likely caught Wall Street's attention though was that the company amended its capital return program alongside its blowout fourth-quarter earnings release to add $50 billion to its share repurchase authorization.
With the share price climbing as high as $485 the day after it reported earnings, the annual dividend yield amounts to a paltry 0.41%. That's not going to get most dividend investors very excited about buying shares in the big tech company.
But dividend investors shouldn't overlook Meta's decision to initiate a dividend just because the yield is extremely low. In fact, the dividend may be one of the most important things to come out of Meta's earnings report for long-term investors.
Management's signaling a lot of confidence
Meta has had a generous capital return program for several years. It started with a modest share repurchase authorization in 2017, but quickly ramped up the buybacks. Over the past three years, management has bought back $92.3 billion of its stock.
The new share repurchase authorization adds another $50 billion in potential buybacks on top of the existing $31 billion under its pre-existing authorization. That's a lot of money, even for a company that's worth $1.2 trillion.
While share repurchases are a great way for management to return capital to shareholders, there's no requirement for management to use even one penny of retained earnings to buy back stock. On the other hand, a dividend is a much stronger commitment. With the dividend, the board is saying it'll return cash to shareholders every quarter. It's starting with dividend payments amounting to about $5 billion annually.
What's more, dividends are sticky. Most companies don't declare dividends for just a quarter or a year. They start paying a dividend with the intent of paying it for years to come. What's more, most expect to pay more cash to shareholders every year.
That's a sign of confidence from management that it'll produce consistently strong and growing cash flow and earnings for years to come to support a dividend.
Opening the door for a broader group of investors
Some investors won't buy a stock unless it pays a dividend. Now that Meta's joined the fray, even if it yields just 0.4%, it could attract the eyes of a whole new subset of investors.
Importantly, the dividend could provide a floor for the stock, as long as investors can reasonably expect Meta to meet its commitment to the quarterly payments. If the stock price drops, the yield will increase to the point of becoming attractive to some dividend investors. With the strong prospects for dividend growth from Meta, it won't take a very high current yield for it to be an attractive dividend investment.
What's more, Meta now qualifies for inclusion in a whole new set of index funds and ETFs. Those focusing on dividend growth, in particular, may soon find themselves owning a small piece of Meta.
Following in the footsteps of giants
Meta's dividend strikes similarities to the two biggest companies in the world: Microsoft (NASDAQ: MSFT) and Apple (NASDAQ: AAPL).
All three are tech giants, which aren't historically big dividend payers. But both Microsoft and Apple have consistently increased their dividends while reinvesting plenty of money into the businesses to grow faster and faster every year.
When Microsoft declared its first dividend in 2003, it paid shareholders an annual payment of $0.08 per share. That translated to a yield of about 0.3% at the time. Nonetheless, Microsoft's produced market-beating returns over the last 20 years while returning tons of cash to shareholders. It now pays $3 per year.
Likewise, Apple reinitiated its dividend in 2012, paying shareholders $2.65 per quarter. That worked out to a fairly attractive yield of 1.8% at the time. But similar to Microsoft, Apple has been able to consistently raise its dividend every year while growing the business. As a result, shares have increased more than eightfold since it first declared its dividend, not to mention that the quarterly dividend payment has increased by 2.5 times.
It may be tough to see how Meta grows its stock price as much as Apple or Microsoft have since they each initiated their dividends. After all, it's already a $1.2 trillion business. But for a little bit of perspective, Microsoft and Apple were already the largest publicly traded companies by market capitalization in the years they initiated their dividends.
At the very least, investors can expect consistent capital returns from the dividend, which should support the stock price and provide confidence to investors that management sees a lot more cash flow and earnings in the future.
