Tesla Model S side panels, strong but light. Source: Flickr
For your information, Tesla is currently a non-cash-dividend-paying stock, which means shareholders will not be receiving any cash on the common stocks.
This is based on the company’s 2022 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 cash dividends as most peers, including Toyota, Volkswagen, Ford Motor and General Motors have been decent dividend payers.
While General Motors (NYSE:GM) and Ford Motor (NYSE:F) have suspended the dividend payments during the pandemic, Toyota has continued paying out substantial cash dividends even amid 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 to see if the case for a cash dividend coming from Tesla can play out or not.
In this article, we will explore several reasons that Tesla may or may not be a dividend-paying stock.
Let’s read on!
Tesla Dividend Topics
Reasons That Support A Dividend
P1. All Automakers Are Dividend Payers
P2. Growing EV Sales And Market Share
P3. Rising Revenue Across All Segments
P4. Rising Profitability Across All Segments
P5. Growing Profit And Cash Flow
P6. Low Debt Level And Leverage
P7. Cash Rich Company
P8. Potential Dividends Rate And Yield
Reasons That Do Not Support A Dividend
C1. Battery Scalability
C2. Rise Of Hydrogen Power
C3. Elon Musk Is Not Keen On A Cash Dividend
Summary And References
S1. Summary
S2. References and Credits
S3. Disclosure
All Automakers Are Dividend Payers
The first argument that Tesla should be paying cash dividends is that most, if not all of its peers are doing so.
For example, General Motors, Ford Motor, Toyota, Porsche Automobil Holding SE, Volkswagen, and even BYD Company Limited from China, just to name a few, are returning cash to shareholders, meaning that they are all dividend-paying auto manufacturers.
Therefore, why not Tesla?
As most automakers or car companies pay cash dividends, that means being an auto manufacturer can be an extremely profitable undertaking.
These companies are not only profitable but also cash-flow rich.
The notion of a capital-intensive operation for an automaker is true but only to a certain extent.
For example, in Tesla’s case, a sizeable capital outlay was only applied during the initial setup of the company.
Once that initial phase has passed, the company will benefit immensely from these investments in the following years and be able to retain most of the profit produced by the businesses, just like what happens to Tesla now.
Here is a table that shows the 3-year retained earnings of Tesla from 2020 to 2022:
Tesla’s Retained Earnings As At The End Of The Financial Year
| As at 31 December | |||
|---|---|---|---|
| 2022 | 2021 | 2020 | |
| Retained Earnings ($ Millions) | $12,885 | $329 | -$5,399 |
As shown in the table above, Tesla’s retained earnings soared to a massive $13 billion as of 2022 Q4, a rise of 40X from the previous year.
Therefore, that proves the profitability nature of being an automobile company, particularly for Tesla.
While it is also true that most automakers have been investing for expansion even years into the business, they are doing so and at the same time still being able to distribute cash to shareholders indicates that their businesses have been profitable enough for both expansions and capital return to shareholders.
Therefore, car-making can be an extremely profitable business, and thus, the case for a cash dividend coming from Tesla should easily be playing out in the near future.
Growing EV Sales And Market Share
Tesla EV delivery numbers
Another reason that Tesla may soon be joining the cash dividend-paying bandwagon is the continuous growth of the company’s EV sales and rising market share.
As shown in the chart above, Tesla’s EV delivery has been continuously growing and reached record milestones every year.
What’s important is the outlook given by Tesla about its EV delivery for 2023.
For example, Tesla guided for 1.8 million EV sales in 2023, a rise of roughly 40% over 2022.
While Tesla’s EV deliveries may reach nearly 2 million units in 2023, this figure represents less than half of the vehicle sales of its peers such as Ford Motor and GM.
You can check out Ford Motor and GM’s vehicle sales figures here: Ford Motor Vehicle Sales and GM Vehicle Sales.
Therefore, there are plenty of opportunities ahead for Tesla.
More importantly, Tesla is already making so much money now even before reaching the milestone achieved by Ford Motor and GM in terms of car sales figures.
Imagine what Tesla will be making when it is selling a minimum of 4 million vehicles every year which is what Ford and GM have been selling for years.
Apart from the growing vehicle sales, Tesla’s market share also has been on the rise as shown in the snapshot below:
Tesla market share by region
While market share has been rising, it was still in the low single-digit territory for most regions as shown.
Therefore, there will be plenty of market share to grab for Tesla, and it is likely coming from fossil fuel vehicles.
Moreover, the world is intensifying its effort to curb climate change, and this means there will be even more demand for EVs.
Again, this is another opportunity for Tesla to expand its market share.
As Tesla is at the forefront of EV technology, its EV sales and market share will only further expand in the future.
Mind you, we have not even touched on the energy segment of Tesla which also may grow due to the world’s transition to green energy.
Therefore, the case for a cash dividend coming from Tesla is getting even stronger considering what lies ahead for the company in the future.
Rising Revenue Across All Segments
Tesla revenue by segment
The likelihood of Tesla distributing a cash dividend depends not only on the growth of its automotive sector but also on the growth of other business segments, including the energy sector.
As shown in the chart above, we are seeing very strong revenue growth not only in the automotive sector but also in other business segments.
On a historical basis, the revenue of these segments had been on a tear, especially in the automotive segment.
While Tesla’s automotive sector has grown exponentially, its energy segment also has done fairly well.
Over a 5-year period, Tesla’s energy revenue has grown 250%, or 50% year-over-year on average over the last 5 years.
Going into the future, the revenue of all segments will only be rising, given all the factors that we mentioned in prior discussions.
More importantly, Tesla’s energy segment may still be in its infancy, considering the energy revenue reported in 2022 represented only 5% of the automotive revenue.
As the world races towards a green future, the demand for solar and energy storage will definitely skyrocket.
And, Tesla is in a great position to capture the growing demand for solar and energy storage.
Again, Tesla’s growing revenue across all segments will make the case for a cash dividend extremely likely.
Rising Profitability Across All Segments
Tesla profit by segment
While revenue across all segments has been on a rise, Tesla’s profitability in all segments also has been doing fairly well.
As shown in the chart above, Tesla’s automotive sector is by far the most profitable among all segments, with a gross margin coming in at 29% as of 2022.
In addition, this figure also has been on a rise in the last couple of years, indicating the growing profitability of the automotive segment.
Apart from the automotive segment, Tesla also has become profitable in other business segments as of 2022, including the energy and services segments.
In other words, Tesla has become profitable in all of its business sectors as of 2022.
The profitability of Tesla’s services segment will likely continue in the future considering that this segment is largely dependent on the automotive sector.
Therefore, as automotive revenue grows, so will the services revenue and profitability as reflected in the chart above.
As seen, Tesla’s services gross margin has steadily turned around from being unprofitable to profitable when its revenue increases.
On the other hand, Tesla’s energy profitability may not have the same trend as that of the services segment as Tesla’s energy is largely an independent unit.
However, we are seeing a very successful turnaround of Tesla’s energy unit in 2022 when its gross margin reached 7%.
Mind you, this profitable trend may not be continuously positive in the near future as gross margins may tumble again.
This is so because Tesla’s energy is still relatively a small segment compared to the automotive and has yet to achieve volume production.
As a result, the energy segment is still plagued with a high cost of production which deters margin expansion as seen in the low gross margin in the past several years.
However, on a long-term basis, I believe Tesla’s energy will be doing very well for reasons that were mentioned in prior discussions.
In short, Tesla’s growing profitability in all segments bodes well for the company and makes the case for a cash dividend coming from the company highly possible.
Growing Profitability And Cash Flow
Tesla profit and cash flow
On a consolidated basis, Tesla is also highly profitable and generates tonnes of free cash flow as reflected in the chart above.
As seen, Tesla has not only been profitable since 2020 but also generates tonnes of billions of free cash flow in the same period.
Particularly, Tesla’s profitability in all business segments as of 2022 which we saw in prior discussions has translated to huge EBITDA, profit before taxes, and free cash flow in the same fiscal year.
More importantly, Tesla’s profitability and positive free cash flow on a consolidated basis have been on a rise over the years and reached record highs as of 2022.
Mind you, the rising trend is likely to continue in the foreseeable future given the rising demand for EVs, energy storage, and solar products all around the world.
Again, as Tesla is at the forefront of the green energy revolution, it is in a great position to capture the rising demand for all of these products.
In return, Tesla’s huge profit and free cash flow will likely be translated into capital returns to shareholders in the foreseeable future in the form of cash dividends.
Low Debt Level And Leverage
Tesla debt level and leverage
Other than being profitable, Tesla also is low on debt and leverage.
As shown in the chart above, Tesla’s debt level has been on a decline after reaching $13 billion in 2019.
As of 2022, Tesla’s debt level totaled only $3 billion, the lowest level in the last 7 years.
Tesla’s low debt level has been largely driven by the company’s aggressive debt extinguishment in the last couple of years.
Again, Tesla’s capability of repaying its debt indicates the highly profitable nature of the business.
Moreover, Tesla’s debt leverage was at the lowest level as of 2022, topping only 7% with respect to equity as shown in the chart.
As Tesla’s debt has slowly declined, its interest expenses also follow suit and fell to the lowest level as of 2022 as shown in this article – Tesla Interest Expense.
The steady drop in interest expense has translated to a more profitable Tesla.
Also, this trend will continue in the foreseeable future as the company has not taken on any new long-term debt as of 2022.
Therefore, the case for a cash dividend from Tesla is even more likely with the decline in debt, leverage, and interest expense.
Cash Rich Company
Tesla cash and net debt
Tesla is not only profitable but also cash rich as shown in the chart above.
For example, Tesla’s cash and investments have ballooned to a massive $22 billion as of 2022, which was more than enough to pay its total debt multiple times.
As a result, Tesla’s net debt came in at -$19 billion as of 2022 as cash was much higher than the debt level.
With $22 billion of cash on hand or $19 billion after accounting for total debt, Tesla is not only cash-rich but also high in liquidity as cash alone accounts for a massive 54% of the company’s current assets.
With this amount of cash on hand, Tesla can definitely afford to return a portion of that cash to shareholders in the form of dividends.
Potential Dividend Rate And Yield
Tesla’s 2023 Dividend Rate And Yield
| Estimate And Actual Results | ||
|---|---|---|
| 2023 Estimate | 2022 Actual | |
| Annual Revenue ($ Billions) | $118 | $81 |
| Adjusted EBITDA ($ Billions) | $28 | $19 |
| Free Cash Flow ($ Billions) | $12 | $8 |
| Dividends Declared ($ Billions) | $2 | – |
| Dividend To EBITDA Payout Ratio (%) | 7% | – |
| Dividend To FCF Payout Ratio (%) | 17% | – |
| Dividend Rate (US$) | $0.60 | – |
| Dividend Yield (%) | 0.4% | – |
Let’s say Tesla will return $2 billion of cash to shareholders in the form of dividends in 2023.
The amount of cash dividend represents only 7% of the 2023 EBITDA estimate and 17% of the 2023 free cash flow estimate which is reasonably low.
In terms of the dividend rate, shareholders will get roughly $0.60 USD per share on the back of 3.2 billion shares outstanding.
For dividend yield, if you have bought Tesla’s stock at $170 USD per share, your yield will come to only about 0.4% which is quite low.
While $2 billion of cash dividends may be small, Tesla can certainly afford to raise the dividend to a higher amount, say $6 billion which will come to only about 50% of the 2023 free cash flow estimate.
Then your dividend yield will come to about 1% based on a stock price of $170.
Tesla may not be willing to return $6 billion of cash to shareholders, considering that it will consume half of the free cash flow.
However, Tesla can certainly afford a $2 billion cash dividend payout.
Nevertheless, I bet that Tesla’s shareholders will be more than happy to have any amount of cash dividend declared as they get not only capital appreciation from the stock but also a little bit of cash which is a plus to them.
Tesla May Be Held Back By Battery
Lithium Carbonate Spot Prices
Tesla may be at the top of the world now, but it may soon face a shortage of batteries that will put the company’s expansion on hold.
Particularly, Tesla or its suppliers may not be getting enough lithium soon, the main component used in an electric battery, to power millions of electric vehicles sold every year.
While there is enough lithium in the world to power the electric vehicle revolution, there is only a small quantity that is economically viable to mine as reserves, according to this analysis from Substack.
The worrying part is that the supply of the world’s lithium in 2021 was only enough to produce 11 million EVs and 14 million EVs in 2023.
While the production of lithium will increase over time when new technology is available, it still takes roughly a decade to put a new mine ready for production, according to World Economic Forum again.
Besides, the IEA predicted that the world could face lithium shortages as soon as 2025.
Therefore, there is simply not enough lithium on the face of the planet to power all the EVs as of now.
If this is the case in the foreseeable future, Tesla’s growth in the EV space may face a bottleneck and may have to switch to a new energy source, ie. hydrogen, to power its vehicles.
This scenario can definitely derail Tesla’s plan of distributing a cash dividend to shareholders because margins may shrink and profitability could go down.
The Rise Of Hydrogen Power
Lately, hydrogen-powered vehicles are getting a lot of attention, and this technology may seem capable of replacing battery-electric vehicles.
There are a few advantages of hydrogen-powered vehicles to battery electric vehicles.
The biggest advantage is that hydrogen is literally an infinite resource compared to lithium as there is an abundant supply of hydrogen around us. Take water for example.
Therefore, there is no restriction in terms of materials used in a vehicle as in the case of lithium.
However, this advantage applies only to vehicles that are directly powered by hydrogen instead of a hydrogen fuel cell.
A hydrogen fuel cell vehicle is quite similar to a battery electric vehicle in which an onboard electric battery is still required.
A second advantage is that you can refuel a hydrogen-powered vehicle as quickly as you refuel a fossil-fuel vehicle.
And, a hydrogen-powered vehicle has a much longer range compared to a battery-electric vehicle.
However, hydrogen-powered vehicles have been struggling to take off due to several limitations.
First, a hydrogen vehicle is inefficient compared to a battery-electric vehicle due to high energy loss.
Second, the infrastructure to refuel hydrogen-powered vehicles is literally non-existent.
Third, hydrogen-powered vehicles are simply too costly to make and maintain based on today’s technology.
However, if the technology behind the hydrogen revolution can one day solve these limitations, then it may become viable and will definitely threaten the existence of Tesla.
If this day really comes, the investment thesis for Tesla can literally be thrown out and the question of cash dividends from Tesla is no longer relevant.
Elon Musk May Not Be Keen On A Dividend
One of Tesla’s largest shareholders cum CEO, Elon Musk, may not be keen on returning capital to shareholders in the form of cash dividends.
Tesla’s other shareholders may share the same thoughts as the CEO.
The reasons? Tesla is still relatively a young company and taking cash out of the company now may threaten its growth in the future.
Tesla needs the cash for reinvestment to expand and develop new technology.
There are many areas in the company where Tesla desperately needs cash to improve and resolve.
For example, Tesla’s full-self-driving (FSD) technology is still pending regulatory approval and not ready to have no one behind the wheel, according to Reuters.
Authorities say that the technology is still not good enough without a driver as self-driving is a very complex task that requires human interaction.
Therefore, Tesla’s full-self-driving technology is definitely an area that needs a sizable investment to resolve and to make it practical.
While autonomous driving is one area that needs improvement, other areas such as the charging infrastructure and mobile service fleet also require capital injection, and probably a huge one too.
Tesla needs to expand its Supercharger infrastructure as quickly as possible to make electric vehicles more viable.
The limited range of electric vehicles may still be a hindering factor that consumers choose fossil fuel vehicles over battery-electric vehicles.
In addition, Tesla’s solar and energy is one area that definitely needs investment as this segment may have been overlooked all these years when the company aggressively expanded its automotive sector.
Other areas where Tesla can spend its cash include buying a piece of land, if not a country that is rich in lithium where Tesla can mine the heck out of it to keep its battery cost down.
In addition, Tesla may consider a buyout of an EV startup such as Rivian or Nikola.
Therefore, it is probably better for Tesla to spend its cash on reinvestment rather than returning it to shareholders as the company is still in the growing stage.
Conclusion
As Tesla does not pay a dividend, investors for now can only gain from the stock price appreciation.
Since there are more reasons that support a cash dividend from Tesla, should Tesla go ahead to declare a dividend?
What do you say?
References and Credits
1. All financial figures in this article were obtained and referenced from Tesla’s quarterly and annual filings which are available in the following link: 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
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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