There comes a time when a growth stock has to take a good look in the mirror and ask itself if it’s time to start appealing to income investors, too. Facebook (NASDAQ:FB) is seemingly at that juncture.
“Wait a minute,” you might push back. “Did you see Facebook’s latest quarter?”
It’s a fair counter, at first. Facebook did have a strong financial report this earnings season. Revenue soared 56%. Net income more than doubled.
Take a closer look, though. User growth is slowing. What’s the company going to do with its growing vault of cash? It’s time for it to become a growth and income play for investors before the market figures out that it’s not exclusively the growth play that it was in the past. It’s time to Facebook to start cutting checks that its shareholders can cash.
The top- and bottom-line results sound great, but it’s important to remember that advertisers were pulling back their spending a year ago when the planet was starting to shelter in place. Take a closer look at Facebook’s latest report and you will find that user growth has only risen by 7% over the past year. Was engagement on the rise at least? Not really. The number of ads served up by Facebook inched just 6% higher. The real driver here was a double-take-inducing 47% surge in revenue per ad, largely the result of depressed results a year earlier.
As impressive as the headline results were in the second quarter, the stock still took a hit on the earnings news. The company warned that revenue growth will decelerate sharply on a sequential basis through at least the next two reports as it laps the pop in revenue over the past four quarters. There are also regulatory concerns and a recent privacy-minded update on Apple (NASDAQ:AAPL) iOS devices that will make it harder to target marketing missives on Facebook.
No one should be surprised that user growth has slowed to the single digits at Facebook. The namesake platform and its Messenger application are being used by 2.9 million people a month. Throw Instagram and WhatsApp into the mix and the parent company is reaching 3.51 billion monthly active users. We’re at 46% of the planet!
If you think that the other half of the world will hop onto the S.S. Facebook in the next few years, I think you might want to take a more global view. There are only 4.66 billion people with internet access right now, and 75% of them apparently are already on Facebook’s roll call of active users. It’s also a safe bet that the next wave of new users won’t be as lucrative as the earlier adopters.
If none of this convinces you that Facebook should start paying out a dividend before it gets outed as a slow-growing mature blue chip, what do you think it should do with all of its money? The company is a money machine, generating $22.7 billion in free cash flow over the past year alone.
Facebook is sitting on more than $64 billion in cash right now. It’s not going to use it on acquisitions. Regulatory agencies worldwide have the company under the microscope these days. It can buy back shares, but with the stock hitting all-time highs earlier this month, is that really the best move? Initiating a dividend distribution policy is the right call here.
Facebook is trading at 25 times this year’s projected earnings. I’m not suggesting that CEO Mark Zuckerberg should announce a 4% yield and basically hand over all of its annual profits (even though it still has that hefty cash balance in the bank). But there is clearly a place somewhere north of zero that will appeal to income stock investors while also rewarding its longtime shareholders for buying and holding. Make it happen, Facebook. You might be surprised at how quickly the market taps the “like” button.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
View more information: https://www.fool.com/investing/2021/08/19/its-time-for-facebook-to-start-paying-a-dividend/