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Why Doesn’t Tesla Pay Dividends?

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

Why doesn’t Tesla pay a dividend?

Well, that’s certainly one of the most frequently asked questions about Tesla and the answer to this question is simple – Tesla hasn’t been profitable enough 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 most investors are expecting Tesla (NASDAQ:TSLA) to pay dividends now or in the future as its rivals, including Ford and General Motors had been decent dividend payers.

General Motors (NYSE:GM) and Ford (NYSE:F) had been paying cash dividends for several years before they suspended the payments in 2020.

While Tesla may have not joined the ranks of a dividend payer yet, it’s still worth exploring in its financials to see if the company can afford a cash dividend payout.

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 Total Revenues

Tesla revenue growth

Tesla revenue growth

Let’s first look at Tesla’s revenue growth which is shown in the chart above for the period from 2015 to 2020.

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.

All the figures in the chart look like setting a new record in every quarter.

Unfortunately, dividends are not paid out of revenue or sales. Dividends are paid out of profits or free cash flow to be precise.

This is where the problem comes for Tesla. Tesla has not been profitable or profitable enough to be a dividends payer.

As impressive as the revenue growth may seem, Tesla will always be unable to pay out a dividend as long as the company is not consistently profitable.

Tesla’s Operating Profit

Tesla operating income

Tesla operating income

The chart above shows Tesla’s trailing 12-months (TTM) operating profit or operating income for the period 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 solar products.

While Tesla’s revenue growth has been super impressive 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 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 in all the negative operating incomes. 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 core operation is just not capable of producing the sort of profits that can sustain 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 managed to produce operating profits of more than $1 billion consecutively in 3 quarters in 2020.

As of 2020 4Q, Tesla’s operating income reached nearly $2 billion on a TTM basis. Tesla still needed to account for other expenses though, such as interest expenses and taxes for the profits it made from business operations.

If Tesla can keep its growth at this pace 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 profit

Tesla net profit

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.

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

Since Tesla has been consistently having losses in terms of net profitability, it is unlikely that the company would 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 started to turn positive in 2Q 2020.

As of 2020 4Q, Tesla’s net income totaled more than $700 million on a TTM basis.

While Tesla managed to make a profit, the amount was far from enough to meaningfully sustain a dividend payout.

Aside from consistency, Tesla’s profit has to be big enough to cover the dividend payment.

Tesla has to keep its growth momentum continues in the coming quarters if it ever wants to be a dividend payer.

Tesla’s Earnings Per Share

Tesla earnings per share

Tesla earnings per share

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 about Tesla to investors. For instance, investors can find out whether Tesla has made a profit in a particular quarter from 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 starting from 2020 2Q on a TTM basis. In most cases, the company had negative EPS in almost all quarters, with 2018 being the worst-hit period.

Likewise, Tesla was unlikely to declare a dividend out of a negative EPS, as the company was struggling with profitability.

However, Tesla’s investors can finally start seeing light at the end of the tunnel when Tesla reported its 1st positive EPS in Q2 2020 on a TTM basis.

As of Q4 2020, Tesla’s post-split EPS soared to $0.63 on a TTM basis, indicating rising profitability on a per-share basis.

Investors who are hoping for a dividend payment from Tesla just need to be a little patient with the company as Tesla has only started to be profitable as recently as 2020.

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

Tesla free cash flow

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 for the period 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 track to not only profitability but also positive free cash flow as seen from the positive figures in the chart.

According to the chart above, Tesla managed to generate as much as $2.8 billion in free cash flow on a TTM basis in 2020 Q4.

What’s encouraging is that Tesla has been free cash flow positive consecutively 8 quarters in a row from 2019 to 2020.

Although the $3 billion of free cash flow may seem like a lot, it was only peanuts to Tesla considering that the company had used up as much as $5 billion in cash flow from investing activities in 2017.

Nevertheless, the $3 billion of free cash flow was a good start for Tesla and it represents an important achievement for the company.

For the first time in Tesla’s history, its free cash flow reached beyond $1 billion in multiple quarters since 2019.

While Tesla has generated free cash flow in the billions in several quarters, the amount was still far from enough for the company to start 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.

For your information, General Motors’ free cash flow was close to $10 billion for the company to achieve a dividend to free cash flow payout ratio of around 40%.

For now, Tesla needs to keep the extra cash to pay for operating expenses and capital expenditures for growth and for expansion.

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 significantly more traction in the coming quarters or years, I foresee that the company will soon be able to join the ranks of a dividend-paying company.

Conclusion

Tesla has been on the sideline when it comes to paying out a dividend while most of its peers such as Ford, Toyota and General Motors have already joined the ranks of dividend-paying stocks.

Again, why doesn’t Tesla pay dividends? The answer is simple – it is only starting to be a profitable company and has yet to make a profit that is big enough to sustain a dividend payout.

For now, Tesla needs to retain its tiny profits and free cash flow for growth and expansion.

Investors need to be patient with Tesla while the company is 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. Some figures are author’s own calculation.

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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