It seems like it's only a matter of time. eBay (EBAY 2.40%) has already been the target of speculation about whether the company will ever split its Marketplace business and the PayPal business. However, based on the company's current performance it seems like just a matter of time before the company opens up the coffers.
Enabling growth
If you just look at eBay's top-line growth of 14%, some investors might think that eBay is running in the slow lane compared to Amazon.com's (AMZN 1.56%) sales growth of 23%. However, relative to a large retailer like Wal-Mart Stores (WMT 0.48%) and its just 2% growth, eBay appears to be doing fine.
The problem with using revenue growth as a metric to compare these companies is, eBay's core business is best measured in the commerce it enables. By this measure, eBay grew by 24% on a year-over-year basis. As you can see, eBay's Marketplaces business is doing much better than some might realize.
A change is coming
Of course for many investors, the eBay Marketplaces business is the "old" eBay. The company's PayPal business gets a lot of attention and for good reason. While Amazon looks to its Web Services division for growth, and Wal-Mart is going smaller with its Neighborhood Market concept, both businesses are less than 10% of total revenue.
By comparison, eBay's PayPal business is large and booming. PayPal's net payment volume jumped by 27% on a year-over-year basis, which was the fastest growth rate in the last four quarters. More importantly, this division generated more than 43% of eBay's total revenue. To take the comparison even further, if we exclude service revenue, PayPal generated almost the same revenue as the Marketplaces business.
While PayPal used to rely on eBay for its success, in the current quarter on eBay volume grew by 15%, but Merchant Services revenue jumped by more than 30%. The bottom line is, PayPal is about to become eBay's largest business by revenue and when that happens the company's overall growth rate should improve.
3 months = almost $900 million
If there is one question that eBay investors should be asking it is, when do I get a dividend? If we look at the old guard in the technology area, champion growth companies from Cisco Systems to Microsoft are now paying dividends.
Of course Amazon isn't paying a dividend, but it's difficult to compare Amazon's cash sucking operations with eBay's huge free cash flow. In any given quarter, Amazon might report positive or negative free cash flow as it chases growth. In the last quarter, the company generated just $20,000 of core free cash flow (net income + depreciation – CapEx) though the company generated about $20 billion in sales. Wal-Mart is in the opposite situation as it generates billions in free cash flow and has become a growth and income play.
eBay on the other hand, generates millions in free cash flow and has huge margins, yet investors don't see a dime in dividend payments. In the last three months alone, eBay generated nearly $900 million in core free cash flow.
Even if eBay only used 50% of its core free cash flow on a new dividend payment, this would equate to about $0.35 per quarter with about 1.27 billion shares outstanding. This would equate to an annual dividend of $1.40, and at today's prices would give investors a yield of about 2.9%.
Given that analysts are expecting earnings growth of about 13% per year in the next few years, a yield of near 3% would make the shares far more attractive. In addition, a yield like this would potentially attract income investors as well.
In the end, eBay's lack of a dividend is part of why the shares trade at just over 16 times projected 2014 EPS. Given that Wal-Mart has a lower yield than what it seems eBay could afford, and a lower expected growth rate, some investors would likely make a switch. While Amazon has a faster growth rate, the shares also trade at about 100 times 2015's projected EPS.
There will still be talk about whether eBay will split its two main businesses. However, one way to quiet this speculation is to start mailing dividend checks. It's harder to criticize management when you're getting cash in your pocket every few months.
