It seems like more tech companies are starting to pay dividends as a new way to excite investors about their stock. Salesforce (CRM 1.27%) was one of the first to participate in this trend, but the question is, is it a good idea? After all, there's still a lot of growth to be had.
However, investors should know some facts about dividends. While this may not be great news for Salesforce as a business, it's excellent news for Salesforce investors.
Salesforce is becoming more disciplined in its spending habits
During its fiscal year 2024 fourth-quarter (ended Jan. 31) release, Salesforce announced a quarterly dividend of $0.40 per share. This works out to a dividend yield of about 0.5%, so it's not one that investors can retire off of (unless they own a lot of Salesforce stock). But, what this dividend does for Salesforce is far greater.
The optics of cutting a dividend have far greater effects than initiating or increasing a dividend. As a result, once a company starts a dividend, it tends to protect that at all costs. This requires becoming more conservative in spending, as a downturn or recession will strike someday. This keeps companies like Salesforce from rapidly expanding their workforce to tackle new industries or push hard to sell a new product. However, that isn't necessary when a company reaches Salesforce's size and influence.
Salesforce is the market leader in providing customer relationship management (CRM) software, which helps manage relationships with these clients. CRM includes understanding customer data, running sales and market campaigns, and performing other customer service needs.
One of the biggest new areas Salesforce is entering is artificial intelligence (AI). Its Einstein AI uses generative AI to help customers and CRM users.
Investors may be led to believe that Salesforce is initiating a dividend and may not have the resources necessary to develop and market this product properly. However, due to its sheer size, Salesforce already has the engineering and marketing team to make this product successful.
So, Salesforce's dividend is serving as a tool to make the company more efficient. It also utilizes its current size and capacity to selectively attack different market opportunities, especially one as large as AI.
However, does the dividend do anything to make the stock investable?
Salesforce is putting up respectable growth
While it's likely that few people would tell you they bought a stock for a 0.5% dividend, other aspects of Salesforce make it intriguing. In Q4, its revenue rose 11% year over year to $9.3 billion, and earnings per share (EPS) were $1.49 after the company posted a $0.10 loss last year. Looking ahead, Salesforce expects about 11% revenue growth in the first quarter and 9% in fiscal year 2025. However, its full-year EPS is expected to come in between $6.07 and $6.15, indicating nearly 50% growth.
This signifies a maturing company, as its EPS is rising substantially faster than its revenue growth. This isn't a bad thing, as businesses like Microsoft and Alphabet have been successful in doing this for a long time.
Now that Salesforce is transitioning into becoming a consistently profitable company, we'll use its forward price-to-earnings (P/E) ratio to assess the stock because of the large transformation the business is undergoing.
CRM PE Ratio (Forward) data by YCharts
Twenty-nine times forward earnings isn't cheap and represents a pretty hefty premium to the S&P 500's forward P/E of 20.7.
So, is Salesforce stock a buy? I'd say it depends. Other big tech companies are growing faster and trading at a lower price point (like Alphabet and Meta Platforms). However, Salesforce could surprise investors throughout the year and provide greater-than-expected growth, making the stock look cheap.
Salesforce stock isn't a bad buy right now, but it isn't the greatest value.
