Meta isn’t your father’s dividend stock

| February 23, 2024

Dividend stocks have a stodgy reputation: low-growth, boring companies that provide steady income and little else. So when Meta, the parent company of Facebook, Instagram, and WhatsApp, announced its first dividend, the financial press wondered whether the company’s best days as a growth company were behind it.

After all, many businesses have a similar life cycle: start up, ramp up to high growth, then a decline in growth. When companies pass the high growth stage, some of them start a dividend program. That might be because these companies can’t identify growth projects to plow all their profits into.

But let’s take a look at Meta’s fundamentals: Historical annual revenue and earnings growth is above 30%, an extremely high rate, especially for a company with $135 billion in annual revenues. At that size you’d expect growth to slow down, and analysts are predicting long-term earnings growth of 22%. That’s still a very high rate for a company of this size.

So Meta might be signaling a slowdown of growth, but it’s hardly a mature business like a utility. Dividends and growth aren’t mutually exclusive. In fact, lots of great growth companies pay them. Costco, for example, has historical annual sales growth of almost 10% and earnings growth of almost 14%, both high rates for a business with more than $240 billion in annual sales. And on average it pays out about 28% of its earnings as a dividend.

Meta’s dividend is modest, and doesn’t seem to sacrifice many growth opportunities. In February, the yield—the dividend relative to the stock’s price—was a modest 0.4%. That’s far below what you’d consider a stock primarily of interest for its dividends. Based on expected earnings for this year, the dividend would be only about 10% of Meta’s profits.

Finally, let’s remember that dividends generally are a good thing. First of all, dividends are a responsible use of profits. As many companies say, dividends are a way of “returning cash to shareholders.”

Dividends also signal confidence by the company that it will be able to generate profits in the future. That’s because starting a dividend program isn’t a decision that’s taken lightly. Investors tend not to view a suspension of dividends favorably, so businesses don’t want to start issuing them unless they believe they’ll be able to earn enough in the future to pay them.

Dividends are also good corporate governance. You can’t pay dividends with fake profits.

I view Meta’s new dividend program as a passage into adulthood. It’s taking on more responsibility to shareholders and hoping to form long-term relationships with them. It’s also joining other elder statesman in the tech industry such as Microsoft and Apple in paying dividends.

I’m sure many of you believe your best days are ahead. If analyst estimates are generally correct, Meta still has plenty of runway for growth. The new dividend program shouldn’t detract much from expansion programs.

Sources:

https://finance.yahoo.com/quote/META/analysis?p=META

https://ssg.betterinvesting.org/study/ssgplus/?studyid=16192772


Evan R. Guido is the Founder of Aksala Wealth Advisors LLC, a 2018 Forbes Next-Gen Advisors List Member, and Financial Professional at Avantax Investment ServicesSM. Evan heads a team of retirement transition strategists for clients who consider themselves the “Millionaire Next Door.” He can be reached at 941-500-5122 or eguido@aksalawealth.com.   Read more of his insights at https://finance.heraldtribune.com/category/ask-guido/. Securities offered through Avantax Investment ServicesSM, Member FINRA, SIPC.  Investment advisory services offered through Avantax Advisory ServicesSM, Insurance services offered through  an Avantax affiliated insurance agency.  6260 Lake Osprey Dr. Lakewood Ranch, FL 34240.  The views and opinions presented in this article are those of Evan R. Guido and not of Avantax Wealth Management® or its subsidiaries.  Past performance does not guarantee future results. The S&P 500 is an index of 500 major, large-cap U.S. corporations. Standard & Poor's is a corporation that rates stocks and corporate and municipal bonds according to risk profiles. The S&P 500 is an index of 500 major, large-cap U.S. corporations. You cannot invest directly in an index.  An investment in a money market fund is not insured or guaranteed by the FDIC or any other government agency.  Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.  CDs are FDIC insured and offer a fixed rate of return.  They do not necessarily protect against a rising cost of living.  The FDIC insurance on CDs applies in case of insolvency of the bank, but does not protect market value.  Other investments are not insured and their principal and yield may fluctuate with market conditions. Investments are subject to market risks including the potential loss of principal invested.