It’s usually a big deal when a firm initiates a regular dividend payment. But for some, the announcement is momentous and perhaps game-changing. This is particularly true when it comes to high-growth tech stocks. So, when Facebook parent Meta Platforms (META) recently announced it was paying a dividend, the investing world went ga-ga.
But there is a method to META’s decision. And ultimately, the announcement to start paying a regular dividend could be wonderful for both current and future shareholders.
META’s Dividend Decision
For many tech stocks, the idea is that firms in the sector are seeking growth. To that end, they must reinvest every penny of profit back into the business to help achieve that growth. Because of this, the sector isn’t historically well-known for its dividend prowess. All of that changed a decade ago when Cisco (CSCO) broke the mold and announced it would pay a dividend to its investors.
Since then, a variety of mega-cap tech stocks are now big-time dividend stocks. And now we can add Facebook to that list.
In its fourth quarter earnings report, META announced it will start paying a dividend. For recordholders as of February 22, the firm will pay 50 cents per share per quarter. This works out to a yield of around 0.50%.
Investors cheered the decision. The stock surged and added about $130 billion in market cap in just 15 minutes. This pushed the firm to a total valuation of over $1.1 trillion, making it the seventh-largest public corporation in the world.
Why Launch a Dividend Now?
So, why did META decide to launch a dividend?
The answer could be simply that it’s making too much money. Last quarter, the stock managed to pull in more than $40 billion in sales and $14 billion in profits. This follows a trend of the firm minting cash over its history. Aside from a few bad quarters—where artificial intelligence and metaverse spending hit growth—META has largely delivered strong earnings growth.
This has pushed META’s cash pile to more than $61 billion. Even with aggressive spending and buyback plans, that’s a lot of cash on a balance sheet.
Some investors have worried that the dividend could signal that META is now maturing and its growth profile is slowing. Nonetheless, augmented reality and new forays into A.I. for ads are starting to deliver and should help keep the growth going. Meanwhile, its regular ad business via its social media platforms saw growth amid rivals’ contractions.
Another reason could be its insider and founder-heavy ownership structure. Dividends are a wonderful way for owners to extract cash from a business without having to sell shares. The reality is founder Mark Zuckerberg and other key Facebook owners are getting older and a dividend is a great way to support philanthropy and other needs without selling. This is speculated as one of the main reasons why Microsoft (MSFT) initiated its payment back in 2013 when Bill Gates semi-retired from the company. Gates could still maintain control and support his other efforts without selling shares. META could be doing the same thing.
Going Forward
In the end, META’s dividend decision should be seen as a positive. Investors were first concerned about growth when MSFT and Apple (AAPL) started their payouts. Pull up any chart of those stocks and you can see that growth and stock appreciation haven’t been an issue.
If anything, META’s decision could bring more investors into the stock. With a payout, META now has the potential to be included in many dividend indexes and actively managed dividend funds. Moreover, a different class of investor could now consider shares for their portfolios. At the same time, growth remains, keeping many investors seeking those types of returns into the stock.
The combination could push up shares further over the long haul.
META’s decision could also spur some other heavy-founder-owned big tech stocks to join in the dividend party. Both Google (GOOG) and Amazon (AMZN) fit the bill, having large cash balances, strong growth, and heavy insider ownership. In an effort to stay competitive with investors, the pair could also launch payouts soon.
In the end, META’s decision is a positive one for investors. The large cap tech stock has continued to find growth and continues to reward its shareholders.
The Bottom Line
It’s a big deal when a stock announces a dividend. It’s a very big deal when a major stock does so. With Meta Platform’s recent dividend announcement, the game has changed for its investors. And in the end, that’s a good thing.
