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Will Tesla Ever Pay Dividends?

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

Will Tesla ever pay a dividend? Well, that’s a question that has been asked multiple times and the answer to this question will most likely be disappointing to most, if not all, investors.

For your information, Tesla is currently a non-dividend paying company as of this article was published. This is based on the company 2019 annual filing 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 most investors are expecting Tesla (NASDAQ:TSLA) to pay out dividends now or in the future. Major automakers such as General Motors (NYSE:GM) and Ford (NYSE:F) have been regularly delivering cash dividends quarter over quarter to investors.

While Tesla may have not joined the ranks of a dividend-paying stock yet, it’s still worth exploring in its financials to see how close the company has come to paying out a dividend.

In this article, we will explore the reasons why Tesla may not be able to pay out a dividend just yet and investigate these issues by diving into the company’s financials.

Furthermore, we will also discuss how the company may start paying dividends soon if it can resolve some of its current woes.

Therefore, just sit tight and read on!

Tesla’s Total Revenues

Tesla revenue chart (TTM)

Tesla revenue chart (TTM)

Before going any further, let’s first look at Tesla’s revenue growth which is shown in the chart above.

The chart above shows a plot of Tesla’s trailing 12-month (TTM) revenue between 2015 and 2020.

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

Unfortunately, dividends are not paid out of revenue or sales. It’s paid out of profit or free cash flow to be precise.

And, this is where the problem comes for Tesla. Tesla has not been profitable all these years.

As impressive as the revenue growth may seem, Tesla will always be unable to pay out a dividend as long as the company does not make a profit.

Let’s take a look at the following charts that show Tesla’s profitability and free cash flow.

Tesla’s Operating Profit

Tesla operating income chart (TTM)

Tesla operating income chart (TTM)

The chart above shows Tesla’s trailing 12-months (TTM) operating profit or operating income between 2015 and 2020. The operating profit depicts Tesla’s profitability that is derived from operating activities such as manufacturing and sales of electric vehicles and energy products.

While Tesla’s revenue growth has been nothing short of extraordinary, the revenue success story has not translated to success at the bottom line, particularly the company’s operating profit which is shown in the chart above.

From 2015 to 2020, Tesla’s operating profit growth has been a stark contrast to the revenue growth which we saw earlier.

As seen from the chart, Tesla’s quarterly operating income has been mostly in the red from 2015 to 2020 except in the last couple of quarters in 2020 when Tesla managed to eke out some profitabilities.

Prior to 2020, we can see that Tesla has been operating at a loss as reflected by the negative operating income. A negative operating income implies that Tesla has lost money in its operations, even before taxes and interest expenses are paid.

That said, Tesla has been unable to cover its taxes and interest expenses, let alone dividend payments.

With this in mind, Tesla’s existing operation is just not capable of producing the sort of profits that can sufficiently support a dividend payout.

Nevertheless, there is hope. If you look at the chart again, Tesla’s losses have been narrowing. In fact, the company has even managed to produce an operating profit of more than $1 billion on a TTM basis as of 2020 Q2.

If Tesla’s operating profitability keeps improving in the coming quarters or years, the company may possibly announce an investor-friendly dividend policy in the near future.

Tesla’s Net Profit

Tesla net income chart (TTM)

Tesla net income chart (TTM)

The chart above shows Tesla’s net profit measured on a TTM basis from 2015 to 2020. The net income or net profit is the profit after tax when all expenses have been paid for, including preferred shares dividends if there is any.

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

Similarly, Tesla’s net profit as shown in the chart above, has also been running at a loss in most quarters from 2015 to 2020 except for the most recent quarter in 2020.

Since Tesla has been consistently suffering huge losses in terms of net profitability, it is unlikely that the company will declare a dividend out of negative net profits.

Again, there is hope. Similar to the operating incomes, Tesla’s net incomes have also been on track to profitability.

If you look again at the current chart, Tesla’s net losses have narrowed down significantly since 2019 and even turned positive at nearly $400 million on a TTM basis in 2Q 2020.

The possibility of an investor-friendly dividend policy will probably materialize in the near future if Tesla’s net profitability keeps improving and reaches a threshold that is large enough to support a dividend payment.

Tesla’s Earnings Per Share

Tesla EPS chart (TTM)

Tesla EPS chart (TTM)

The last metric in the income statement that income investors frequently use to analyze dividend sustainability would be the earnings per share (EPS).

The EPS is regularly associated with a number of dividend metrics such as the dividend to earnings payout ratio and the dividend coverage ratio. These metrics are generally used in measuring dividend payout sustainability.

Since Tesla has been having negative EPS as seen in the chart above and is not paying any dividends at this moment, these dividend analysis metrics are literally useless when it comes to performing dividend analysis on Tesla.

Nevertheless, the EPS can reveal quite a lot of information to investors. For instance, investors can find out whether Tesla has made a profit in a particular quarter from studying the EPS alone. Also, the trend of the EPS over a certain period of time can tell investors about the growth of the company in terms of profitability.

Moreover, the EPS provides a powerful analysis when combined with share prices to generate the price to earnings ratio in which investors often use to measure the stock valuation.

According to the chart, Tesla only managed to generate a positive EPS in 2020 2Q at about $2.00 from a TTM standpoint. In most cases, the company posted negative EPS in almost all quarters, with 2018 being the worst-hit period.

Likewise, Tesla is unlikely to declare a dividend out of a negative EPS, as the company is still struggling to squeeze profitability.

However, Tesla’s investors can finally see the light at the end of the tunnel now when Tesla reported its 1st positive EPS in Q2 2020 on a TTM basis. Investors who are hoping for dividend payment from Tesla just need to be a little patient with the company.

Again, if the trend of a positive EPS can continue persistently in the future, Tesla’s investors can reasonably expect a dividend payout from the company soon.

Tesla’s Free Cash Flow

Tesla free cash flow chart (TTM)

Tesla free cash flow chart (TTM)

While earnings per share is a useful variable in dividend analysis, the 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 earnings or profits. For this reason, I have created a chart above that tracks Tesla’s free cash flow on a TTM basis from 2015 to 2020.

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 results show that Tesla is on the right track to not only profitability but also positive free cash flow generation as seen from all the positive free cash flow which totaled as much as $1 billion in 2Q 2020 from a TTM perspective.

Although the $1 billion of cash may seem like a lot to you, it was only peanuts to Tesla considering that the company could consume up to $5 billion of cash flow from investing activities in 2017.

Nevertheless, the $1 billion of free cash flow represents an important achievement for the company. For the first time in Tesla’s history, it has successfully generated a positive free cash flow of more than $1 billion in multiple quarters since 2Q19.

In terms of dividends, the $1 billion of free cash flow is far from enough for the company to pay a dividend. A more reasonable figure would be in the ballpark of $10 billion on a TTM basis for Tesla to even start thinking about initiating a dividend-paying policy.

As of now, Tesla needs to keep the cash to pay for its operating expenses as well as capital expenditures.

Although Tesla may not be capable of declaring a dividend now, it is on the right track.

If Tesla’s road to positive free cash flow gained more momentum in the coming quarters or years, I foresee that the company will soon be able to join the ranks of a dividend-paying stock.

Conclusion

As of 2Q 2020, Tesla was still on the sideline when it comes to paying out a dividend while most of its peers such as Ford and General Motors have already joined the ranks of dividend-paying stocks.

Again, will Tesla ever pay dividends? The answer is yes, judging from the fundamental improvement that we have seen in the company. Investors just need to give Tesla more time while it’s working hard to achieve what it is meant to do.

References and Credits

1. All financial figures in all charts and tables on this webpage were obtained and referenced from the quarterly and annual filings between 2018 and 2020 which can be found in the following websites: Tesla Financial Results.

2. 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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