Meta Platforms (META 1.18%) shocked many investors by initiating a dividend this year. The technology titan is starting small with a $0.50 per share quarterly payment ($2.00 annually). That works out to a relatively paltry dividend yield of 0.44%.
That meager yield won't catch the eye of most dividend investors. However, here's why those focused on dividends won't want to overlook Meta Platforms' payout.
NASDAQ: META
Key Data Points
Data dividend lovers will love
Many dividend-focused investors put too much emphasis on a stock's current yield. While yield is important for retirees, those focusing solely on a stock's yield are shortchanging their returns. That's evidenced in the returns data on stocks by their dividend policy:
|
Dividend Policy |
Average Annual Total Returns |
|---|---|
|
Dividend growers and initiators |
10.2% |
|
Dividend payers |
9.2% |
|
No change in dividend policy |
6.6% |
|
Dividend cutters and eliminators |
(0.6%) |
|
Dividend non-payers |
4% |
|
Equal-weighted S&P 500 index |
7.7% |
Data source: Ned Davis Research and Hartford Funds. NOTE: Returns data from 1973-2022.
As that data shows, dividend-paying stocks have significantly outperformed non-payers over the past half-century (9.2% average annual total return compared to 4%). However, the best total returns came from dividend growers and initiators, which significantly outperformed companies with no change in their dividend policies. That's likely because dividend growers retain more cash to grow their business (and dividends).
This returns data on companies that initiate and grow their dividends bodes well for Meta Platforms. While it has been an outlier since its initial public offering (IPO, by generating a market-beating 23.6% annualized total return), the company's decision to initiate a dividend it will likely grow puts it in a strong position to continue delivering market-beating returns.
That's because paying a dividend makes companies more disciplined allocators of shareholder capital. They have less cash to invest, which forces them to focus on investments that earn attractive returns for investors. For example, a more financially disciplined Meta might have opted not to burn through tens of billions of dollars in investor capital to build its metaverse that hasn't paid off.
What's small today might not be so small tomorrow
Meta Platforms' CFO Susan Li made it clear on the company's recent third-quarter earnings conference call that its decision to pay dividends doesn't alter its strategy. It has historically returned capital to investors through share repurchases. Li commented, "We expect that share repurchases will continue to be the primary way that we return capital to shareholders." It's now evolving that strategy to include dividends to give it more balance and flexibility in how it returns capital to shareholders in the future.
However, while Meta isn't prioritizing paying dividends, given the company's growing earnings and cash flow, it should be able to increase its payout over time. The company generated $43 billion in free cash flow over the past year, while its current dividend payment level will cost it about $5 billion annually. That leaves it with lots of room to grow the dividend and repurchase shares, especially given its cash-rich balance sheet ($65.4 billion in cash and marketable securities against $18.4 billion in debt).
Given the low dividend payout ratio and Meta's rapid growth, it could increase its payout at a strong rate in the future. For example, fellow tech titan Microsoft has grown its dividend at a more than 10% compound annual rate over the past decade. If Meta grew its payout at a similar pace, it would double its current payment level in about seven years.
The company's growing cash flow and cash returns should help it continue producing strong total returns. Meanwhile, investors who hold for the long term could be in line to potentially collect meaningful dividend income from Meta by the time they retire as it increases its payout.
The potential to become a dividend growth machine
Meta Platforms' initial dividend payment level might not appeal to many dividend investors. However, they shouldn't overlook that the company appears to be in an excellent position to grow its payout at a healthy rate. Because of that, Meta's dividend could be much more meaningful in the future. Further, companies that grow their dividends tend to outperform over the long term. These factors make Meta a stock that dividend investors won't want to immediately dismiss.
