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Can Facebook Pay A Dividend That Yields 1% In 2021?

14 Wall Street. Source: Flickr

This article explores the question of whether Facebook can afford to pay a dividend that yields at least 1% in 2021.

Before answering the question, let’s take a quick look at Facebook’s dividend history and policy.

For your information, Facebook has never declared or paid any cash dividends since its IPO in May 2012.

Here is an excerpt regarding Facebook’s dividend policy extracted from the company’s 2020 annual report:

  • Dividend Policy
    We have never declared or paid any cash dividend on our common stock.

    We intend to retain any future earnings to finance the operation and expansion of our business and fund our share repurchase program, and we do not expect to pay cash dividends in the foreseeable future.

Therefore, Facebook has been a non-dividend-paying stock.

Investors who have bought or are planning to buy Facebook’s common stocks can only gain from price appreciation of the common stocks.

However, this does not rule out the possibility of Facebook paying a cash dividend in the future since the company has been profitable and generating tonnes of cash.

More importantly, Facebook is still a growth stock and is estimated to grow in double-digit figures in 2021 despite having a market cap of $1 trillion.

In fact, the chance for Facebook to pay out a cash dividend in the near future is very real given that the company has already been returning tonnes of capital to investors in the form of shares buyback.

In this article, we will explore Facebook’s fundamentals to find out if the company can afford to pay a dividend that yields at least 1% or maybe more in 2021.

Let’s take a look!

Facebook’s Estimated Dividend Payout

Facebook's estimated dividend payout for fiscal 2021

Facebook’s estimated dividend payout for fiscal 2021

* Facebook’s estimated dividend payout comes from the author’s own calculation.
* Facebook’s fiscal year begins on Jan 1 and ends on Dec 31.

To find out how much Facebook needs to pay for a dividend that yields 1%, we will need to do some reverse-engineering on Facebook’s financials and start from its stock price.

To this end, Facebook’s stock was traded at around $350 at the time this article was written.

Therefore, for a 1% dividend yield, Facebook’s cash dividend per share will amount to about $3.50 USD.

Facebook has about 2.8 billion shares outstanding based on the 1Q 2021 quarterly filing.

Facebook shares outstanding

Facebook shares outstanding

Therefore, Facebook’s estimated total dividend payout will amount to nearly $10 billion as shown in the table above.

This amount is the total cash outflow that Facebook will pay if it decided to initiate a dividend payment by the end of fiscal 2021.

Facebook’s Earnings Growth

Facebook's earnings growth for fiscal 2021

Facebook’s earnings growth for fiscal 2021

* Facebook’s earnings growth estimate is extracted from Yahoo Finance.

We need to estimate Facebook’s earnings growth for fiscal 2021 if we want to find out whether the company can afford to pay a cash dividend in the same fiscal year.

According to Yahoo Finance, Facebook’s earnings are expected to come in at $13.12 USD per share in 2021 based on the average estimates of 53 analysts.

The result represents a 30% earnings growth in 2021 compared to the $10.09 reported earnings in fiscal 2020.

Be reminded that this growth rate is including the effect of share buyback.

Therefore, Facebook’s actual earnings growth without share buyback will be slightly smaller.

Assuming that Facebook’s shares buyback will contribute about 10% of earnings growth for fiscal 2021, the actual earnings growth without share buyback will be 27%, about 3ppt less than the estimated growth rate.

Using the 27% growth rate estimate, Facebook’s net income will grow to about $37 billion by the end of fiscal 2021.

Facebook's estimated net income for fiscal 2021

Facebook’s estimated net income for fiscal 2021

* Facebook’s net income for fiscal 2021 is an estimated figure and is calculated by the author.

Facebook’s Projected Operating Cash Flow

Facebook's cash conversion ratio

Facebook’s cash conversion ratio

* Facebook’s cash conversion ratio is calculated by the author and is based on the ratio of the company’s net income to net cash from operations.
* Facebook’s operating cash flow for fiscal 2021 is an estimated figure and is calculated by the author.

In the past 5 years, Facebook has generated tonnes of operating cash flow and this cash has been on the rise as seen in the table above.

Facebook is a powerful cash machine as reflected in the cash conversion ratio that averages around 1.5 in the past 5 years.

However, Facebook’s cash conversion ratio has been on a decline and amounted to only 1.3 in fiscal 2020.

Using the latest cash conversion ratio, Facebook’s net cash from operations will come to about $48 billion on the back of the estimated $37 billion net profit for fiscal 2021.

Facebook’s Free Cash Flow

Facebook's free cash flow

Facebook’s free cash flow

* Facebook’s free cash flow is calculated by the author and is based on the difference between the company’s net cash from operations and capital spending.
* Facebook’s free cash flow for fiscal 2021 is an estimated figure and is calculated by the author.
* Facebook’s capital spending includes purchases of property and equipment, principal payments on finance leases, purchases of equity investment, and acquisitions of businesses, net of cash acquired, and purchases of intangible assets.

A discussion of dividends will be incomplete without involving free cash flow.

According to the table above, Facebook’s estimated free cash flow will total $14 billion in fiscal 2021.

This figure is arrived at based on the assumption that Facebook’s capital spending will grow as much as 50% in fiscal 2021.

In the past 5 years, Facebook’s capital spending grew at an average rate of around 52%.

To simplify the calculation, I assumed that Facebook’s capital spending to grow optimistically at 50% for fiscal 2021.

In short, Facebook is estimated to generate about $14 billion of free cash flow for fiscal 2021.

Facebook’s Dividend Payout Ratio For 1% Yield

Facebook's estimated dividend payout ratio for 1% yield

Facebook’s estimated dividend payout ratio for 1% yield

* Facebook’s dividend-to-earnings payout ratio is calculated by the author and is based on the ratio of the company’s estimated dividend payout with respect to net earnings.
* Facebook’s dividend-to-free cash flow payout ratio is calculated by the author and is based on the ratio of the company’s estimated dividend payout with respect to free cash flow.

Since we already have the estimated earnings and free cash flow figures, we can figure out Facebook’s affordability of a cash dividend by looking at the company’s dividend payout ratios which are shown in the table above.

According to the table, Facebook’s dividend-to-earnings payout ratio will come to about 27% for a 1% dividend yield.

This ratio looks reasonably low for Facebook.

Therefore, with respect to earnings, Facebook can certainly afford to pay out as much as $10 billion in cash dividend that will yield 1% at a stock price of $350 USD per piece.

In fact, there is plenty of room for Facebook to raise the dividend at a payout ratio of only 27%.

On the other hand, with respect to free cash flow, Facebook’s dividend payout ratio comes to about 69% for the same dividend payout that yields 1%.

At this ratio, Facebook’s dividend payout with respect to free cash flow is a bit stretched given that the dividend will be consuming close to 70% of the estimated free cash flow in fiscal 2021.

While Facebook may sufficiently cover the estimated dividend with earnings, its dividend coverage with respect to free cash flow is on the high side.

Therefore, Facebook may not be able to pay out such a massive cash dividend due to the high free cash flow payout ratio.

Additionally, Facebook also has been buying back shares since fiscal 2017 and the share buybacks have consumed a cash flow of about $6 billion on average in the last 4 years.

Therefore, Facebook may be reluctant to return this much capital to shareholders.

However, if Facebook expects to generate a considerably higher operating cash flow than the estimated figure for fiscal 2021 and the company can continue to grow in the double-digit figure, the respective dividend payout is still feasible.

Facebook’s Dividend Payout Ratio For 3% Yield

Facebook's estimated dividend payout ratio for 3% yield

Facebook’s estimated dividend payout ratio for 3% yield

* Facebook’s dividend-to-earnings payout ratio is calculated by the author and is based on the ratio of the company’s estimated dividend payout with respect to net earnings.
* Facebook’s dividend-to-free cash flow payout ratio is calculated by the author and is based on the ratio of the company’s estimated dividend payout with respect to free cash flow.

Will a 3% dividend yield be possible for Facebook?

According to the table above, Facebook’s dividend payout will come to about $30 billion for a 3% dividend yield.

The respective payout ratio will clock in at 80% and 206% with respect to earnings and free cash flow.

At this level of payout ratio, Facebook’s cash dividend payment is way off the chart.

In other words, Facebook will not be able to afford a cash dividend payout that yields 3% based on a stock price of $350 USD per share.

In short, the $30 billion cash dividend is too massive for Facebook to return to shareholders.

Conclusion

While Facebook certainly can afford a cash dividend that yields 1%, it will be a bit stretched out for the company to do so.

This is so because the dividend will consume as much as 70% of Facebook’s free cash flow.

The free cash flow consumption has not even taken into account the cash outflow for share buyback that averages around $6 billion per year.

Therefore, a more reasonable figure for Facebook’s cash dividend will be around $6 billion.

This figure is also in line with the share buyback number that averages around $6 billion for the last 4 years.

Based on the outstanding share number of 2.8 billion, Facebook’s $6 billion cash dividend payout will come to about $2.15 USD per share.

At this figure, Facebook’s cash dividend will yield about 0.6% for a stock price of $350.

I think Facebook’s shareholders will be more than happy to get this amount of cash dividends given that the company has no prior history of paying out a dividend.

Additionally, if you have bought Facebook’s stocks at a much lower price, for example, at $200 USD per piece, your dividend yield will come to about 1%.

References and Credits

1. Facebook’s financial figures were obtained and referenced from the respective financial statements which can be obtained from the following links:

a) Facebook Investor Relations
b) Yahoo Finance

2. Featured images in this article are used under creative commons license and sourced from the following websites: 14 Wall Street and Financial District.

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