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In the final quarter of 2023, the tech giant $Meta Platforms(META)$ reported revenue and diluted earnings per share growth of 25% and 203% respectively, crushing market expectations and driving its share price skyrocketing.
But in addition to that, the social media giant dropped another bombshell: it announced its first dividend, paying out a quarterly dividend of $0.50 per share at the end of March.
Now, for a tech company as big as Meta, is paying a dividend a wise move or a huge mistake?
What do tech giants' dividends usually mean?
If you look at the dividend-paying stocks in the US market, you'll notice that they tend to be companies that are in a more mature stage of their lifecycle. Companies like $Apple(AAPL)$ $Wal-Mart(WMT)$ $JPMorgan Chase(JPM)$ return cash to shareholders through dividends.
In contrast, earlier-stage companies, aka startups or growth companies, prefer to reinvest their funds to increase their intrinsic value and create even greater value for shareholders.
So, does Meta's dividend mean its growth potential is limited? After all, other tech giants like $Amazon.com(AMZN)$ $Tesla Motors(TSLA)$ $Alphabet(GOOG)$ $Alphabet(GOOGL)$ still haven't paid dividends.
But Meta's situation is a bit different.
Let's get this straight: Meta's dividend doesn't necessarily mean its growth prospects are limited in the coming years.
Based on the current number of outstanding shares, the company's total dividend payout in 2024 will just exceed $5 billion, or about 12% of its free cash flow last year.
The company's chief Financial officer, Susan Li, said in the fourth quarter 2023 earnings call that the launch of the dividend is a useful complement to the company's existing share repurchase program, and increases the company's flexibility in the way it returns cash to shareholders. Meta also authorized a new $50 billion share buyback line.
Now, some might argue that with the Reality Labs project still losing money, so why should the $5 billion in cash be used to pay dividends instead of keeping it for itself?
First, the company is in a strong financial position, with $65.4 billion in cash, cash equivalents and short-term securities, and only $18.4 billion in long-term debt. So, paying dividends won't put any financial pressure on the company. Meta has enough resources to continue investing in AI-related projects, especially servers and data centers.
And as for whether paying dividends will damage the company's competitive advantage, there's no need to worry about that. Meta's social media apps have billions of daily active users, driving steady growth in ad revenue. The company's market dominance is not at risk of being threatened anytime soon.
Valuation still looks reasonable despite the surge
After bottoming out in October 2022, Meta's share price has skyrocketed 289% by February 7, 2023, thanks to a series of positive earnings reports. But its dynamic PE ratio is still only 23.4 (compared to the S&P 500 index's 22.2), indicating that its valuation is still in a very reasonable range.
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