- Meta announces surprise maiden dividend
- There was no market forecast for Meta to start dividends any time over the next three years
- Equates to a meagre 0.4% yield if you annualise the quarterly payment declared at its latest set of results
- Looks like a token gesture and the dividend will sit second place to share buybacks
Dan Coatsworth, investment analyst at AJ Bell, comments:
“Meta has become the fourth member of the Magnificent Seven group of mega cap tech stocks to pay a dividend. The move is surprising given it has flagged a need to invest heavily in AI-related infrastructure, and its metaverse project is gobbling up cash on a quarterly basis with no sign of it making a profit for years to come.
“Tech stocks have historically shied away from paying the kind of dividends you might expect from sectors such as oil and gas, banking and pharmaceuticals. This is because they have a constant need to reinvest money into developing their systems, to stay abreast of technological developments and to fund innovation. These investments help to drive growth in earnings and therefore growth in the share price so investors are principally being rewarded with capital gains rather than income.
“More mature industries with lower growth rates put far more emphasis on dividends as a way of keeping investors interested in their stock. While tech firms have big requirements on their cash flow, a lot of them are still generating enough cash that is surplus to their requirements which is why share buybacks have been prevalent in the sector.
“Share buybacks have been a more popular method of deploying cash and that continues to be the focus for names such as Alphabet, which spends billions of dollars each year in this way and pays no dividends at all.
“US President Joe Biden previously attacked companies for spending money on buybacks rather than boosting investment in their operations and that led to a 1% tax on the activity, with subsequent suggestions this might go up to 4%.
“Meta has declared an intention to pay dividends every quarter, beginning with a 50 cents per share payment. On an annualised basis that equates to $2 per share and a 0.4% yield based on a $461 share price. That’s not going to win over a whole new group of investors looking for income opportunities. In fact, it’s the type of yield to which most investors pay little attention.
“So why is it bothering to pay a dividend at all? Companies start paying dividends when they are more grown up, perhaps when they’ve commercialised an idea and are seeing a steady increase in sales and profits. Meta already has a well-established social media network business with a large income stream from advertising, so one could argue the dividend could have been initiated a long time ago.
“There are other factors to consider. For example, Mark Zuckerberg’s obsession a few years ago with the metaverse led to suggestions the business was going off on a tangent. It was classic entrepreneur behaviour – get tied up with a radical idea and do everything possible to get a first mover advantage.
“The metaverse work continues to proceed behind the scenes but clearly AI has presented an immediate opportunity to enhance Meta’s systems and the way it serves content to users, so that has now given the company and the market a sharper focus, and one where it is easier to see monetary gains from related investment.
“Paying a dividend suggests the company wants to reboot its reputation and be taken more seriously. But ultimately the amount being paid is only a token gesture and chief financial officer Susan Li says that share buybacks will continue to be the main way Meta returns capital to shareholders.”
How dividends compare across the Magnificent Seven group of stocks
Source: AJ Bell, Company announcements, Stockopedia. *Calculation based off $461 pre-market price on 2 February and annualising the $0.50 quarterly dividend declared by Meta in its latest results.