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Why Doesn’t Tesla Pay Dividends In 2021?

Tesla Model S side panels, strong but light. Source: Flickr

Why doesn’t Tesla pay a dividend in 2021?

Well, that’s certainly one of the most asked questions about Tesla and the answer to this question is simple – Tesla has not been massively profitable to be a dividend payer.

For your information, Tesla is currently a non-dividend-paying stock, which means shareholders will not be receiving any cash dividend on the common stocks.

This is based on the company’s 2020 annual filings which stated the following dividend policy:

Tesla Dividend Policy
“We have never declared or paid cash dividends on our common stock. We currently do not anticipate paying any cash dividends in the foreseeable future.

Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors may deem relevant.“

It’s not surprising that many investors are expecting Tesla (NASDAQ:TSLA) to pay dividends now or in the future as most peers, including Toyota, Volkswagen, Ford Motor and General Motors have been decent dividend payers.

While General Motors (NYSE:GM) and Ford (NYSE:F) have suspended the dividend payments in 2020, Toyota has continued paying out substantial cash dividends even during the age of COVID-19.

Therefore, it’s not a surprise to expect some sort of cash dividends out of Tesla’s stock since the company is already profitable and generates a sizable cash flow.

While Tesla is currently a non-dividend payer, it’s still worth exploring its financial position to see if the case of a cash dividend from Tesla in 2021 can play out or not.

In this article, we will explore Tesla’s financials, its profitability and free cash flow in particular, and investigate the reason that is holding the company from being a dividend stock.

Let’s read on!

Tesla’s Revenue Growth

Tesla's revenue growth

Tesla’s revenue growth

* Revenue data is calculated on a TTM basis and is extracted directly from the company’s earnings releases.
* Tesla’s fiscal year begins on Jan 1 and ends on Dec 31.

Let’s first look at Tesla’s revenue growth which is shown in the chart above for the period from fiscal 2015 to 2021.

For your information, Tesla’s trailing 12-month or TTM revenue is plotted in the chart above.

According to the chart, Tesla’s revenue growth looks extremely impressive, doesn’t it?

Over the last 6 years, the growth of Tesla’s TTM revenue has been nothing short of extraordinary or even breathtaking.

To this end, Tesla’s revenue figures are nearly setting a new record in every quarter as shown in the chart.

Unfortunately, dividends are not paid out of revenue or sales, no matter how impressive the revenue growth may have been in the past or will be in the future.

Instead, dividends are paid out of profits or free cash flow to be exact.

And, this is where the problem comes from for Tesla.

Tesla has not been profitable or massively profitable enough to be a dividends payer.

To be able to afford and sustain a cash dividend, Tesla’s businesses have to be stable and be able to consistently make a profit without fail or even predict correctly what the outlook will be in the future.

However, Tesla’s businesses are in the automotive sector and the automotive industry is known to be not only highly cyclical but also difficult to predict.

Tesla’s Operating Profit

Tesla's operating income

Tesla’s operating income

* Operating profit is calculated on a TTM basis and is extracted directly from the company’s earnings releases.
* Tesla’s fiscal year begins on Jan 1 and ends on Dec 31.

Tesla’s operating profit is derived from the design, manufacturing and sales of electric vehicles as well as solar products.

While Tesla’s revenue growth has been superior all these years, the revenue success story has not translated to the same success story at the bottom line, particularly the company’s operating profit which is shown in the chart above.

From fiscal 2015 to 2021, Tesla’s operating profit growth has been a stark contrast to the revenue growth which we saw earlier.

As seen from the chart, Tesla has been making an operating loss in most of the quarterly results.

And, Tesla has only started to be profitable in recent quarters.

As shown, Tesla’s TTM operating income has only started to be in the black since fiscal 2020 and has continued to do so moving to 2021.

Prior to 2020, Tesla has been operating at a loss in most quarters as seen from all the negative operating figures.

A negative operating income implies that Tesla has lost money in its operations, even before taxes and interest expenses are measured.

Although Tesla has managed to generate positive operating income in recent quarters, the results are not big enough to sustain a dividend payment even if the company can afford to do so.

In addition, dividends are not paid out of operating income either.

Tesla’s Net Profit

Tesla's net income

Tesla’s net income

* Net profit is calculated on a TTM basis and is extracted directly from the company’s earnings releases.
* Tesla’s fiscal year begins on Jan 1 and ends on Dec 31.

The net income or net profit is the profit after tax when all expenses have been accounted for, including taxes and preferred shares dividends if there is any.

In general, dividends are usually declared out of net profits.

Similar to the operating income, Tesla’s net profit also has been running at a loss in most quarters from fiscal 2015 to 2021 except for the most recent quarters in 2021.

For example, Tesla’s net loss hit nearly $1 billion in most quarters in 2019.

However, a turnaround has come knocking around. Similar to the operating incomes, Tesla’s net incomes also have been on track to profitability.

As seen in the current chart, Tesla’s net losses have narrowed down significantly since 2019 and started to turn positive in 2Q 2020.

As of 2021 2Q, Tesla has managed to generate a massive net profit that totaled more than $2 billion on a TTM basis.

While Tesla is making a profit, do not expect Tesla to pay out a cash dividend now.

Here is why.

Tesla has started to be profitable only recently and the company needs to reinvest all the profits back for growth.

Besides, Tesla is loaded with debt and has borrowed too much capital in the past to get to where it is now.

Therefore, Tesla needs the profits to pay back its debt and the capital that it has borrowed.

Additionally, Tesla’s net profits are far from enough to cover and sustain a meaningful dividend payout even if the company did pay a cash dividend.

For example, at today’s stock price of $700, Tesla’s cash dividend will only yield in the ballpark of 0.1% if the company did declare a dividend.

At this yield, Tesla is better off not declaring a dividend and save the cash.

Tesla’s Earnings Per Share

Tesla's EPS

Tesla’s EPS

* Earnings per share is calculated on a TTM basis and is extracted directly from the company’s earnings releases.
* Tesla’s fiscal year begins on Jan 1 and ends on Dec 31.

Similar to the net profit, earnings per share or EPS is another metric that is often used to evaluate dividends if there are any.

According to the chart, Tesla has only managed to generate a positive EPS starting in 2020 2Q on a TTM basis.

In most cases, the company had been having negative EPS in almost all quarterly results, with 2018 being the worst-hit period.

While Tesla’s EPS has reached as much as $2.00 USD as of 2Q 2021 on a TTM basis, the company is unlikely to declare a dividend soon for the reasons that we mentioned earlier.

First of all, Tesla has only started to produce positive EPS and the amount may not be enough to cover the cash dividend per share declared.

For example, if Tesla decided to declare a cash dividend, the figure may only yield in the ballpark of 0.1% based on today’s stock price of $700 USD, which is totally meaningless to many investors.

In this aspect, Tesla is better off not declaring a dividend at all and better save the cash for re-investment into the businesses as well as to pay off the existing debt.

Tesla’s Free Cash Flow

Tesla's free cash flow

Tesla’s free cash flow

* Free cash flow is calculated on a TTM basis and is extracted directly from the company’s cash flow statements.
* Tesla’s fiscal year begins on Jan 1 and ends on Dec 31.

While profitability and earnings per share are useful metrics in dividend analysis, free cash flow is an even more powerful tool when it comes to analyzing dividends.

Keep in mind that dividends are actually paid out of cash instead of from earnings or profits. For this reason, I have created a chart above that tracks Tesla’s free cash flow on a TTM basis for the period from fiscal 2015 to 2021.

For your information, free cash flow is the product of operating cash flow minus capital expenditure. Here is the equation that I used to measure free cash flow in Tesla’s case:

Free cash flow = Operating cash flow – Capital Expenditure

Again, the chart above shows that Tesla has been on track to not only profitability but also positive free cash flow as reflected in all the positive figures in the chart since 2019.

According to the chart above, Tesla generated more than $4 billion of free cash flow on a TTM basis in 2021 Q2.

What’s encouraging is that Tesla has been free cash flow positive consecutively for the past 2 years since fiscal 2019.

Although Tesla has produced $4 billion of free cash flow as of 2Q 2021, the company is better off saving the cash for reinvestment and for growth purposes.

At this level of free cash flow, Tesla can only afford a tiny dividend and the respective yield will come to less than 0.1% at today’s stock price of $700 USD per share.

Nevertheless, the $4 billion of free cash flow was a good start for Tesla and it represents an important achievement for the company.

Tesla’s Dividend 2021

Tesla's dividend 2021

Tesla’s dividend 2021

* Projected figures such as earnings per share and revenue for fiscal 2021 are extracted from Yahoo Finance.
* Tesla’s vehicle delivery for fiscal 2021 is obtained from the company’s projected outlook reported in 2Q 2021 earnings release.
* Capital spending for fiscal 2021 is assumed to be in line with that of fiscal 2020.
* Operating net cash is the average of projected maximum and minimum figures calculated by the author.
* Tesla’s fiscal year begins on Jan 1 and ends on Dec 31.

While Tesla did not pay a cash dividend in 2020, can the company afford one now for fiscal 2021?

To find out if the case of a dividend can play out for fiscal 2021, we need to look at Tesla’s projected financial position in 2021.

For example, for a dividend that yields 0.5% based on today’s stock price of $700 USD, Tesla needs to declare a cash dividend with a rate of $3.50 USD per share.

According to the table above, Tesla’s dividend rate of $3.50 USD per share translates to about $4.2 billion of cash payments on the back of 1.2 billion diluted shares outstanding.

The expected cash payment for dividends is quite a stretch for Tesla based on its TTM net profit and free cash flow of only $2 billion and $4 billion, respectively, which we saw earlier.

However, dividends are declared according to future profits and cash flow and not according to historical figures.

That said, we need to look at how much Tesla is expected to make in fiscal 2021.

In fiscal 2021, Tesla is expected to earn a non-GAAP EPS of $5.30 USD or $6.4 billion in non-GAAP net profit.

On the cash side, Tesla is projected to generate $7.1 billion of free cash flow on the back of $10 billion operating net cash and $3.1 billion of capital expenditures.

At this level of earnings and projected free cash flow, Tesla will not be able to afford a cash dividend that yields 0.5% as the payout ratio will be nearly 70% with respect to future earnings and 60% with respect to future free cash flow.

At best, Tesla can only afford $1 billion of cash payment as dividends for fiscal 2021, one that will yield less than 0.1% at today’s stock price of $700.

In short, Tesla is better off not returning any cash to stockholders and keeps the cash for its own use.

Conclusion

In summary, Tesla did not pay a dividend in 2020 because the company was only starting to be profitable and free cash flow positive.

However, the company has made tremendous progress in 2021 in terms of profitability and free cash flow.

While Tesla is projected to make record profits and free cash flow in fiscal 2021, it is still unable to afford a cash dividend in 2021 due to a couple of reasons mentioned.

First off, Tesla’s sky-high stock price has rendered the dividend rate meaningless as the company can only afford a cash payment that will only yield 0.1% at best at today’s stock price of $700 USD.

Secondly, Tesla is still in the early stage of growth and is better off keeping the cash for re-investment as well as to pay off debt.

Investors just need to be patient with Tesla while the company is working its way to achieving what it is meant to do and that is to support the world’s transition into green energy.

That is the mission that Tesla needs to focus on right now instead of returning as much cash as possible to shareholders.

Until the day of a cash dividend arrives, the only way for investors to gain from Tesla’s stock now is through price appreciation.

References and Credits

1. All financial figures in this article were obtained and referenced from Tesla’s quarterly and annual filings available on the following websites: Tesla Financial Results.

2. Some figures came from the author’s own calculation.

3. Featured images in this article are used under the creative commons license and sourced from the following websites: Steve Jurvetson and Automotive Rhythms

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Disclosure

The content in this article is for informational purposes only and is neither a recommendation nor a piece of financial advice to purchase a stock.

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