During the last three months of 2023, Meta Platforms (META 0.57%) reported a revenue and diluted earnings per share bump of 25% and 203%, respectively. Both headline figures crushed estimates, sending shares soaring.
But there was another piece of news that caught investors' attention. The social media giant announced its first ever dividend, a quarterly payout of $0.50 per share that will go out for the first time in late March.
Is this new dividend announcement a huge mistake for the tech giant?
What dividends typically suggest
If you look across the corporate landscape, you'll notice that dividends are usually only paid by businesses that are in a more mature stage of their lifecycles. Companies like Apple, Walmart, or JPMorgan Chase return cash to shareholders in the form of dividend payments.
Earlier-stage enterprises don't follow this strategy. That's because they have far greater opportunities to reinvest the capital on hand into growth initiatives that they believe will produce better returns. The hope is that management can increase the intrinsic value of the businesses over time.
Of Meta's "Magnificent Seven" peers, Amazon, Alphabet, and Tesla still don't pay dividends. Does Meta's new dividend signal limited growth prospects for the company?
Meta's situation is different
To be clear, I don't think Meta is implying that it has limited growth prospects in the years ahead. Based on the current outstanding share count, the business is set to spend just over $5 billion on dividends in 2024, translating to about 12% of its free cash flow last year.
"In terms of initiating a dividend, returning capital to shareholders remains an important priority for us. And we believe introducing a dividend really just serves as a nice complement to the existing share repurchase program," said CFO Susan Li on the fourth-quarter 2023 earnings call.
Li also made the point that this just adds flexibility to how the business can return cash to shareholders. Ongoing share buybacks will remain the key method, with Meta adding $50 billion to its repurchase authorization.
One could argue that given the ongoing sizable losses in the Reality Labs division, specifically with metaverse ambitions, it's best to just conserve that $5 billion that would go toward dividends.
However, Meta is still in a very strong financial position, with cash, cash equivalents, and marketable securities of $65.4 billion on the balance sheet, compared to long-term debt of $18.4 billion. This provides ample resources to keep investing heavily in artificial intelligence (AI)-related initiatives, particularly servers and data centers.
Investors need to consider if the dividend in any way can undermine the company's powerful competitive position. I think based on where things stand today, there is no risk of this being the case.
Meta's family of apps is used by billions of people on a daily basis. And the ad revenue this generates is still growing at a healthy pace. There's no reason to believe this dominance is going to change anytime soon.
Why the stock is a buy
After the stock hit a low in October 2022, it came roaring back thanks to a string of upbeat financial results. Shares are up 289% since the start of 2023 (as of Feb. 7), but they don't appear to be expensive today.
The forward price-to-earnings ratio of 23.4 is very reasonable in my opinion. It's just slightly more expensive than the S&P 500's 22.2, which doesn't make sense. Meta is a significantly higher-quality company than the average one out there.
And given how the business is positioning itself for ongoing success, while at the same time hoping to capture growth from the AI boom, the stock looks like a smart buy.
