Why Meta Platforms’ New Dividend Is a Bigger Deal Than You Think

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With Meta Platforms (NASDAQ: META) skyrocketing to $475 per share following its fourth-quarter earnings, it’s incredible to think such a widely followed stock was bottoming at just $89 a mere 15 months ago in November 2022.

Those who had the courage to invest at that bottom have seen a more than quintupling of their money. But there’s also a good case to be made that Meta stock can continue moving higher from here.

In particular, the company’s recent announcement of its first-ever dividend could help the stock rise even further for a couple very specific reasons.

In the fourth quarter, Meta grew revenue by a strong 25% to $40.1 billion, handily beating expectations, while earnings per share of $5.33 also trounced analyst estimates. Remarkably, Meta was able to achieve that kind of growth even as overall costs declined 8%. And management expects the good times to continue: Meta forecast another 25% revenue growth at the midpoint of its first-quarter guidance as well.

This is quite a remarkable revenue acceleration, even as Meta’s “year of efficiency” wrapped up with a lower cost base. A surprisingly strong economy combined with Meta’s big investments in artificial intelligence infrastructure have improved both engagement and ad effectiveness across its apps.

But with the stock up so much, some may be looking to take profits. For sure, Meta’s valuation has risen. In addition, its strong revenue growth could spur management to go on another hiring binge and abandon the spending discipline it exhibited over the past year.

However, Meta’s newly declared $0.50 quarterly dividend should put most of those concerns to rest.

On the surface, a $0.50 dividend may not seem like a big deal. After all, an annual $2 per share payout would only amount to a 0.4% yield at Meta’s current share price.

But looks can be deceiving. That dividend also equates to just a 13.4% payout ratio based on Meta’s 2023 net earnings per share, leaving lots of room to grow.

Given that Meta should continue to grow its bottom line by double-digits into the future, and the fact that it continues to repurchase stock and lower its share count, one can see Meta’s dividend growing by leaps and bounds in the years ahead.

One example of how much a technology stock dividend can grow is Texas Instruments, which initiated a small dividend back in 2004. Thanks to the growth of the semiconductor sector since that time, TI’s dividend has grown at a whopping 24% annualized rate for 20 years, and is now an astonishing 58 times higher than that initial payout.

Meta’s AI-fueled growth and low payout ratio means its dividend could grow at a similar inflation-trouncing rate into the future. And that could very well keep longtime shareholders who might otherwise think of selling at these levels holding on to the stock for the longer term.

After all, if an investor had bought Meta’s stock 10 years ago, and is now in his or her 30s, 40s, or 50s, the new payout may get them thinking about a nice quarterly retirement income 10 or 20 years down the line. So the new token payout could keep investors in the stock who have might otherwise looked to sell.

Not only should that keep buyers interested and reduce selling pressure, but Meta will no doubt now become a staple of dividend-focused mutual funds and exchange-traded funds. These investment products are restricted to only hold stocks that have reliable dividends, so Meta’s stock now qualifies for these products. Therefore, aside from being highly weighted in market-mirroring index funds or growth-oriented mutual funds, Meta will now see buying demand from dividend funds that are especially popular with older baby boomers.

And baby boomers have a huge amount of outstanding buying power. According to Federal Reserve data as of last June, baby boomers held 56% of the country’s corporate equity wealth. Given that older people tend to look for reliable income streams from their investments, that could mean a surge in demand for Meta’s stock via dividend fund-buying on the part of these retirees. And that could very well drive Meta’s price even higher.

Another hidden benefit of dividend-paying stocks, it has been argued, is that the recurring payouts force management teams to be more disciplined in their spending.

During the 2022 downturn, this was exactly the fear of Meta investors — that CEO Mark Zuckerberg, who exerts control over the company, would continue to overspend on excess staff and throw away billions on his vision of the metaverse, whose payoff is likely a decade away, if it ever actually materializes.

One year ago, Zuckerberg looked to change that narrative by declaring 2023 the “year of efficiency” at Meta. Clearly, Meta has backed that up with an 8% reduction in overall costs despite continued losses in the metaverse-focused Reality Labs segment.

As we enter 2024, however, Zuckerberg said he’d like the focus on efficiency to continue indefinitely. On the recent conference call with analysts, he reiterated, “I think that being a leaner company is helping us execute better and faster, and we will continue to carry these values forward as a permanent part of how we operate.”

Rather than merely taking his word for it, the new dividend payout seems to back that goal up with concrete action.

Meta currently trades around 32 times trailing earnings. But when you back out the $16 billion in Reality Labs losses last year, the trailing multiple on the core business drops to around 24. That’s actually not expensive for a company growing revenue 25%. Now with a new dividend set to grow above inflation for years to come, Meta’s winning streak likely isn’t over just yet.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Billy Duberstein has positions in Meta Platforms and Texas Instruments. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Meta Platforms and Texas Instruments. The Motley Fool has a disclosure policy.

Why Meta Platforms’ New Dividend Is a Bigger Deal Than You Think was originally published by The Motley Fool

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