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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 a lot of investors have been asking and the answer to this question may be disappointing to some.

For your information, Tesla is currently a non-dividend paying company as of this article was published. This is based on the company latest Q4 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 future since most major automakers such as General Motors (NYSE:GM) and Ford (NYSE:F) are dividend kings which have been regularly delivering that juicy 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 gone in its quest to becoming a dividend paying company.

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

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

So sit tight and read on!

Chart of Tesla’s Quarterly Total Revenues

Tesla revenue 2014-2019

Tesla revenue 2014-2019

Before going any further, let’s look at Tesla’s revenue growth. What does revenue have anything to do with dividends you may ask?

The reason is that revenue growth is the simplest factor that tells investors about the durability of sales of a company and hence, the company’s ability to start paying dividend or keep its existing dividend.

With a falling sales or revenue, a company will be reduced to nothing, let alone paying out a dividend.

Speaking of this, the revenue does not necessary have to be growing exponentially, rather a steady revenue growth will do as long as it’s not contracting. A company with contracting revenue tells us either the company is facing intense competition that is eating into its market share or the economy is tanking that has affected the demand for its products and this may affect its dividend paying ability.

Even a dividend king that is profitable and has consistently made dividend payments would find it difficult to keep up with the dividend payments when it finds its revenue contracting consecutively.

Eventually, the respective dividend king or aristocrat may cut or suspend the dividend totally when the revenue tanks to a certain threshold no matter how much profit and cash flow the company is generating.

Boeing is one such example in the current environment when airlines are scrapping all flights in the face of declining air traveling according to this article: Boeing Mulls Dividend Cut.

Moreover, there is only so much profits and cash flow the executives can squeeze out of a declining revenue.

On the contrary, a company with growing revenue would have much more flexibility either in starting or keeping that valuable cash dividend payout. Comparing this to a deteriorating revenue, the executives of a growing company certainly have much easier efforts in squeezing profits and cash flow out of an increasing revenue.

Of course, the respective company has to be profitable and be able to generate strong cash flow to begin with. We will come to this topic later.

Now, when we look at Tesla’s revenue growth based on the chart above, it looks like that Tesla’s revenue has shot to the moon over the past 5 years from 2014 to 2019, signaling that the demand for Tesla’s products has been profoundly strong all these years.

As seen from the chart, Tesla’s revenue was seen growing to record high at more than $7 billion as of 4Q 2019. While revenue has declined significantly to slightly more than $4 billion in 1Q 2019 from over $7 billion in 4Q 2018, it has grown again throughout 2019 and hit record high by the end of the year.

By judging from Tesla’s expanding revenue, we may conclude that the company should be able to initiate a dividend paying policy as revenue growth has been more than 700% over the 5-year period.

Unfortunately, this is not the case and there are other equally important factors that are preventing the company from being a dividend paying company.

In the following paragraphs, we will explore some of these factors that are holding Tesla from joining the ranks of dividend-paying stocks.

Chart of Tesla’s Quarterly Operating Income

Tesla operating income 2014-2019

Tesla operating income 2014-2019

While Tesla’s revenue growth has been nothing short of amazing, the revenue success story has not translated into success on the bottom line, particularly the company’s operating income which is shown in the chart above.

For your information, the operating income is basically the earnings of the company before interest and taxes are accounted for. In other words, Tesla’s operating income is the profits left after all operating expenses and cost of sales are deducted from revenue. The metric measures the operating strength of the company and from analyzing it, investors can find out how much operating income is left to cover taxes, interest expenses and possibly dividend payments if there is any.

Over the 5-year period from 2015 to 2019, the operating income chart above is a stark contrast to the revenue chart which was discussed earlier.

As seen from the chart, Tesla’s quarterly operating income has mostly been in the negative from 2014 to 2019 except for a few quarters in 2018 and 2019. A negative operating income implies that Tesla has been operating at a loss, even before taxes and interest expenses are paid, let alone covering dividend payments.

For instance, Tesla’s quarterly operating loss was the worst during 2017 when total loss was more than $1.5 billion in the entire year.

With this in mind, Tesla’s operation is just not capable of producing the kind of profits that is enough to pay for a dividend according to its latest financial filings dated Dec 31st, 2019.

Nevertheless, there is hope. If you look at the chart carefully, Tesla’s operating profit has been improving. In 2018, total operating loss was reduced to $400 million for the whole year. And in 2019, Tesla’s operating loss had further declined to less than $100 million, indicating that the company is on the right track to producing profit in the coming years and therefore, possibly paying out dividends in the near future.

Chart of Tesla’s Quarterly Net Income

Tesla net income 2014-2019

Tesla net income 2014-2019

Similarly, Tesla’s net incomes which are shown in the chart above have also been in the red in most quarters from 2014 to 2019 except for a few quarters in the most recent years.

Tesla’s net incomes or net profits are profits after tax that all expenses have been paid for, including preferred shares dividends if there is any. Basically, they are the final profits left after accounting for everything but before the expenses for common stocks dividends if there is any.

In Tesla’s case, investors can basically analyze the company’s net incomes to figure out if the company is capable of paying out any leftover from net profits as dividends.

Since Tesla’s net incomes have consistently been in the red, it is unlikely that the company will pay for a dividend out of negative net profits.

However, there is hope. Similar to the operating income which was discussed earlier, Tesla’s net incomes are on the right track to profitability. If you look closely at the current chart, Tesla’s net loss was the worst in 2017 in which the company had lost nearly $2 billion in that year alone.

Things started to improve in 2018 when the company managed to bring net loss to slightly less than $1 billion which was half of the loss in 2017. And in 2019, Tesla had further reduced net loss to roughly $900 million which was about $100 million less than the figure in prior year.

In short, Tesla has slowly improved its bottom line and may soon achieve profitability in the coming years when its volume sales reach certain threshold which is huge enough to bring down its gigantic operating expenses. By that time, Tesla may initiate a dividend paying policy when it’s making enough positive net income.

Chart of Tesla’s Quarterly Earnings Per Share

Tesla earnings per share 2014-2019

Tesla earnings per share 2014-2019

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 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 analyzing metrics are literally useless when it comes to doing dividend analysis for Tesla.

Nevertheless, the EPS can reveal quite a lot of information to investors. For instance, investors can find out whether Tesla 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 which investors often use to find out how high or low the respective stock prices have traded.

When we look at Tesla’s EPS in the current chart, there are only a handful of quarters with positive EPS. In most cases, the company posted negative EPS, with 2017 being the worst hit period. In 2017, Tesla posted close to -$12 per share in EPS. The huge loss in EPS is basically in line with what we have seen so far in operating and net income in prior charts.

Consistent with Tesla’s operating and net income, Tesla’s EPS has recovered from severe losses in 2018 and 2019, posting -$6 and -$5 respectively in both of these years. While Tesla is still suffering from huge loss in terms of EPS, the losses has declined significantly in recent years, indicating that the company is on the right track to profitability if things keep improving in 2020 and onward.

In short, as of Q4 2019, dividend investors who are hoping for Tesla to start paying dividend may have to wait for a little longer as the company is still struggling from huge losses as seen from the company negative earnings per shares over the last 5-years from 2014 to 2015.

Nevertheless, there is already light in the tunnel and investors who are hoping for a dividend payout just need to be a little patience with the company.

Chart of Tesla’s Quarterly Free Cash Flow

Tesla free cash flow 2014-2019

Tesla free cash flow 2014-2019

While earnings per share is a useful variable in dividend analysis, the free cash flow is an even more powerful variable as dividends are basically paid out of cash instead of from earnings. As a result, I have created a chart above which tracks Tesla’s quarterly free cash flow over a 5-year period from 2014 to 2019.

Free cash flow is basically 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

One thing that puzzles investors the most is that a company could have negative profit but still generate positive free cash flow in the same financial period. As pointed in the chart above, this scenario occurred to Tesla when it posted positive free cash flow of more than $500 million in 2Q 2019 but made negative profit in the same quarter.

Most importantly, this quarter of positive free cash flow has made a big difference to Tesla’s annual cash flow in 2019. Instead of having negative free cash flow in the entire year, Tesla has managed to generate nearly $1 billion of free cash flow by the end of 2019 even though the company has lost nearly $900 million in profit in the same year.

While $1 billion of free cash flow may not sound much to Tesla, it represents an important milestone for the company as for the first time in Tesla’s history, it managed to generate positive free cash flow 3 quarters in a row in 2019 as seen in the chart above.

Again, the results show that Tesla is on the right track to not only profitability but also positive free cash flow generation.

Since dividend is paid out of cash, it is possible for the company to execute a dividend paying plan when the company generates enough free cash flow to cover all of its expenses while it is still operating in the red in terms of net income and earnings per share.

How is that possible you may ask? If you look closely at Tesla’s financials, the majority of its expenses in the income statements are non-cash expenses, meaning that they only affect profitability, ie. net income and earnings per share but not free cash flow.

Here is a snapshot that shows Tesla’s operating cash flow as of 4Q 2019:

Tesla operating cash flow Q4 2019

Tesla operating cash flow Q4 2019

As the above snapshot shows, non-cash expenses such as depreciation and stock-based compensation made up a staggering $3 billion of Tesla’s operating expenses in the entire year of 2019.

Since these are non-cash expenses, they do not affect cash flow and in the statement of operating cash flow, these items are added back to operating cash flow as shown in the snapshot above.

For the reason discussed, it is possible for Tesla to initiate a dividend paying policy while it’s still having negative profits and earnings per share.

Of course, in the long run, this scenario is not highly recommended. However, I believe that if Tesla can generate positive free cash flow in future, the road to profitability and positive earning per share should not be that much of a problem for the company. As mentioned, when the company has enough volume of vehicle deliveries, the revenue or sales will be huge enough to offset all the company’s operating costs and expenses.

Overall, if Tesla’s operating results keep improving as seen in the analysis above, I foresee that the company will absolutely join the ranks of being a dividend paying stock in the not-so-distance future.

Conclusion

As of 4Q 2019, Tesla is still a non-dividend paying automaker while most of its peers such as Ford and General Motors have already joined the ranks of a dividend paying stocks.

Revenue growth is the first factor to look at when analyzing the dividend durability of a company or when the company will start initiating a dividend paying plan.

From the revenue chart, we saw that Tesla’s revenue growth just blew investors’ mind over the last 5 years but revenue growth alone does not necessary mean that Tesla can pay a dividend.

Subsequently, we looked at Tesla’s operating income, net income and earnings per share to find out the profitability of the company. The profitability analysis shows that Tesla has incurred more costs than it can earn, resulting in negative operating income, net profit and earnings per share in most of the quarters from 2014 to 2019.

Consistent losses in operation and net profit has prevented Tesla from being profitable enough to execute a dividend paying policy.

However, Tesla’s operating efficiency is seen improving in recent years, judging from its declining losses from 2017 to 2019 which is shown in the charts of operating income, net income and earnings per share.

Finally, we looked at Tesla’s free cash flow to analyze the company’s free cash flow generation capability in our dividend analysis as dividend is literally paid from cash instead of from earnings. We found that Tesla has managed to post $1 billion of positive free cash flow in 2019 which was the first in the company’s history.

If Tesla managed to generate enough free cash flow in future, it may soon capable of paying dividends even though it’s still operating in the red.

Will Tesla ever pay dividends? The answer is yes if it is profitable enough and investors just need to be patience with the company while it’s trying so hard to improving its operating efficiency.

References and Credits

1. All financial figures in the charts were obtained from Tesla Financial Results.

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

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