Facebook parent Meta Platforms (META -2.48%) has been a terrific growth stock since its 2012 initial public offering. The company has delivered market-crushing returns, earning it a valuation above $1 trillion and a spot among the so-called "Magnificent Seven" stocks.
However, Meta Platforms isn't done delivering for its shareholders. Earlier this year, the tech company announced it was initiating a quarterly dividend. Meta Platforms has, so far, appealed to growth-oriented investors, but should income seekers seriously consider investing in the company?
Looking at Meta's underlying business
A dividend is only as good as the company backing it. That's why income seekers, like other types of investors, should pay close attention to a company's underlying business before purchasing its shares for the dividend. There are too many questions to address here, but here is one of the most important: Can the company maintain its dividend program even amid economic issues?
Let's try to answer that question in the case of Meta Platforms, which boasts an ecosystem of nearly 4 billion monthly active users across its websites and apps.
Meta Platforms makes most of its money from advertising. About two years ago, economic troubles led to a decrease in ad spending, and the company's revenue and earnings suffered as a result. However, it was able to bounce back thanks to several rounds of cost-cutting efforts and a rebound in the ad market. Last year, Meta Platforms' revenue increased by a healthy 16% year over year to $134.9 billion. Its net income of $39.1 billion was 69% higher than the previous fiscal year.
The company has improved its advertising business thanks to various initiatives, including Reels (short-form videos) on Facebook and Instagram and an artificial intelligence (AI)-powered algorithm to keep viewers glued to their screens. Though advertising will remain Meta's most important source of revenue for the foreseeable future, the company is looking at other growth avenues. One of them is generative AI. Another one is paid messaging on WhatsApp.
Lastly, Meta Platforms is still working hard and investing billions to ramp up the metaverse. Though it's hard to predict how these projects will turn out, the company has an incredibly impressive history of innovation and one of the largest ecosystems of potential clients on the planet to monetize in umpteen different ways. It's hard to bet against a company like that.
The cautiously optimistic approach
Meta Platforms' success over the past decade has helped it generate growing free cash flow.
META Free Cash Flow data by YCharts
True, it hasn't always been a straight line to the top -- it rarely is, for any company. But it's hard to argue with the general upward trajectory. Meta Platforms will need to continue up that path to sustain its brand-new dividend program. And considering the strength of its business -- and the growth opportunities available to it -- investors have every reason to believe that it can. Meta Platforms' first quarterly dividend per share is for $0.50.
That's not bad. Apple only offers a quarterly amount of $0.24, while Microsoft's is at $0.75. Meta Platforms is at the midpoint between these two long-time, Magnificent Seven dividend payers. The social media specialist's forward yield of 0.40% doesn't look that attractive, but once again, the company is only starting out. Only time will tell whether Meta Platforms will become an outstanding dividend stock. That will depend on factors beyond the health of its underlying business, including the company's capital allocation decisions.
Management did mention the importance of returning capital to shareholders, but the dividend initiation is meant to complement Meta's existing share repurchase program. So, it's not clear whether Meta Platforms will choose to raise its payouts regularly. And considering how many amazing dividend stocks there are on the market, it doesn't make sense to invest in Meta Platforms just for its dividend, at least not yet.
However, for growth investors focused on the long game, Meta Platforms remains a strong buy, and a little passive income on the side never hurt anyone.
