Why Meta Stock Should Pay a Dividend
Facebook parent Meta Platforms (NASDAQ: META) has a cash problem. It wrapped up its fourth quarter with nearly $41 billion in cash, cash equivalents, and marketable securities. Subtracting its long-term debt of nearly $10 billion gives the company a net cash position of about $31 billion when including cash equivalents and marketable securities.
Further, this pile of cash can grow quickly if the company doesn't find prudent ways to spend it. The tech company's average annual free cash flow over the last two years was more than $28 billion.
With both a strong cash balance and impressive free cash flow, it's no surprise that the company recently announced a massive increase to its share-repurchase program. But is management making a mistake by not paying a dividend with some of the excess cash it is using for repurchases?
Here's why paying a dividend might be a smart move for Meta.
Share repurchases can be risky
While share repurchases can provide significant shareholder value, they can also destroy value if they are not executed wisely. Case in point: The company repurchased more than $19 billion worth of its own stock in the fourth quarter of 2021. Shares averaged about $330 apiece during the quarter. By comparison, the stock sits about 48% below this level today. This means Meta significantly overpaid for its stock.
With Meta's stock falling to levels below $100 at one point during the fourth quarter of 2022, the company must have bought its stock much more aggressively at that time, right? Not at all. Meta repurchased less than $7 billion of its stock during the quarter.
To its credit, Meta has returned to its aggressive stance more recently. On February 1, management said it is expanding its share-repurchase authorization by $40 billion (about $11 billion remained on the previous authorization). While the stock is trading substantially lower than it was in 2021, it's worth noting that it's up significantly from lows in 2022. So even this aggressive expansion of its repurchase program is arguably a bit late to the party.
Executing a share-repurchase program well requires exceptional capital skills -- especially when the buyback is meaningful. Meta hasn't yet proven its prowess in repurchasing shares in a measured, shareholder-friendly way.
A dividend would help mitigate some shareholder risk
By choosing to repurchase shares as opposed to paying a dividend, Meta's actions suggest it believes the company's business model is extremely durable. Further, it implies that the company expects its business to continue growing over the long haul. Both of these predictions are fair and, potentially, even conservative given the stock's valuation today. For this reason, there's some merit to share repurchases with the price at today's level.
But to avoid a dividend entirely and rely solely on share repurchases as a means to indirectly return cash to shareholders shows a level of hubris from management. It suggests that management is certain that the business can continue growing over the long haul.
Consider an alternative. If management also paid a small dividend with some of the excess cash allocated for share repurchases, Meta would demonstrate a level of humility. A small dividend would mean that the company (a) realizes how difficult it is to buy back stock in a way that builds shareholder value and (b) acknowledges that there is a small probability of things not going as well as expected.
A view like this might be wise, particularly in light of how a weakness in Meta's business model was exposed starting in late 2021. A change in advertising tracking and measurement on Apple's mobile operating system dealt a substantial blow to the social network specialist's business. This showed how reliant Meta is on other tech platforms, namely Apple's. While the company is working to address this issue, management would be wise to reassess its view that all roads lead to a bigger and more successful Meta years from now.
Ultimately, a regular dividend could help mitigate some of the risk in owning Meta stock. It would put cash in shareholders' hands every quarter while the company dedicates more energy to operations and a bit less to timing stock buybacks. Sure, share repurchases at Meta's stock price today might prove to be a good move in hindsight. But splitting some of the cash it has allocated for a capital return program with dividends would arguably demonstrate enhanced risk management by the company.
10 stocks we like better than Meta Platforms
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now... and Meta Platforms wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of February 8, 2023
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. Daniel Sparks has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Apple and Meta Platforms. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
