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Can Snap Pay A Dividend That Yields 1% For FY2021?

Yellow Tulips. Source: Flickr

Snap has gone public for almost 5 years after completing its IPO in March 2017.

However, the company has never declared or paid any cash dividends for the 5 years that the company has gone public.

The following excerpt extracted from the 2020 annual report shows what Snap has said about its dividend policy:

  • Dividend Policy
    We have never declared or paid cash dividends on our capital stock. We intend to retain all available funds and future earnings, if any, to fund the development and expansion of our business, and we do not anticipate paying any cash dividends in the foreseeable future.

    The terms of our Credit Facility also restrict our ability to pay dividends, and we may also enter into credit agreements or other borrowing arrangements in the future that will restrict our ability to declare or pay cash dividends on our capital stock.

Therefore, Snap’s stock does not pay a dividend now and will probably not pay any cash dividends in the foreseeable future.

For now, Snap’s existing and future shareholders can only gain from the price appreciation of the company’s common stocks.

While Snap has never been a dividend-paying stock, that does not mean that the company will never pay a cash dividend in the future.

Since dividends are paid out of profits and cash, Snap may consider paying a cash dividend if the company can make a decent profit and produce a sizeable free cash flow.

As we all know, Snap operates under the social media space and this industry is highly lucrative as they are asset-light and do not need a factory to manufacture any physical products.

Most social media companies, including Facebook and Twitter, are extremely profitable and generate tonnes of cash.

In addition, most social media companies, including Snap, have little to no debt and are minimally leveraged according to this article: Snap’s Net Debt And Debt To Equity Ratio.

Therefore, the possibility of Snap paying a cash dividend in the future is quite realistic to some extends.

That said, in this article, we are exploring the possibility of Snap paying a cash dividend in 2021 that yields 1% based on today’s stock price of $70 USD.

For example, if you buy Snap’s stock today for $70 USD per share and if the company decides to declare a cash dividend by the end of fiscal 2021 that meets our forecast here, your dividend yield will come to about 1%.

So, let’s take a look to see if this scenario can play out or not.

Snap’s Estimated Dividend Payout

Fiscal Year Snap Share Price ($ USD) Snap Dividend Per Share That Gives 1% Yield Snap Related Dividend Payout ($ Millions)
FY2021 $70 $0.70 $1,080

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

For Snap to pay a cash dividend that yields 1%, the company needs to pay out as much as $0.70 USD per share as a dividend based on today’s stock price of $70 as shown in the table above.

Well, that is just how much cash dividend the company needs to pay on a per-share basis.

Since Snap is projected to have roughly 1.5 billion common stocks outstanding by the end of fiscal 2021, the company’s total cash dividend amount will come to about a little over $1 billion USD as shown in the table above.

Fiscal Year Snap Diluted Shares Outstanding (In Millions) Snap Diluted Shares Growth Rates (%)
FY2016 808
FY2017 1,166 44.3%
FY2018 1,301 11.6%
FY2019 1,375 5.7%
FY2020 1,456 5.9%
FY2021 1,543 6.0%

* Snap’s estimated shares outstanding for FY2021 comes from the author’s own calculation.

While Snap’s share’s outstanding growth rate is averaged at 17% for the past 5 years, this number may not be realistic as most of the growth occurred in earlier years and during the IPO as shown in the table above.

According to the table, Snap’s share outstanding growth rate totaled only 6% in fiscal 2019 and 2020.

Therefore, the realistic share outstanding growth rate for fiscal 2021 may follow that of the past 2 fiscal years.

As such, I am using the 6% growth rate to estimate Snap’s FY2021 share outstanding.

Snap’s Earnings Growth

Snap's projected earnings growth for fiscal 2021

Snap’s projected earnings growth for fiscal 2021

* Snap’s earnings estimate is extracted from Yahoo Finance.

Can Snap really pay out as much as $1 billion as cash dividends?

To find out, we will need to look at Snap’s projected earnings for fiscal 2021.

According to Yahoo Finance (snapshot above), Snap is projected to earn $0.22 USD per share in non-GAAP earnings for fiscal 2021 based on the estimates of 26 analysts.

The FY2021 $0.22 non-GAAP earnings per share will translate to about $340 million non-GAAP net income based on 1.5 billion shares outstanding as shown in the table below.

Fiscal Year Snap Non-GAAP Earnings ($ Millions)
FY2016 -$466
FY2017 -$712
FY2018 -$612
FY2019 -$226
FY2020 -$91
FY2021 $340

* Snap’s non-GAAP net income for fiscal 2021 is an estimated figure and is calculated by the author based on the estimate provided by Yahoo Finance.

Therefore, Snap is projected to earn an estimated non-GAAP net income of $340 million for fiscal 2021, the first non-GAAP profit for Snap since fiscal 2016.

Snap’s Projected Cash Flow

Fiscal Year Snap Non-GAAP Earnings ($ Millions) Snap Net Cash From Operations ($ Millions) Snap Cash Conversion Ratio
FY2016 -$466 -$611 1.31
FY2017 -$712 -$735 1.03
FY2018 -$612 -$690 1.13
FY2019 -$226 -$305 1.35
FY2020 -$91 -$168 1.85
FY2021 $340 $409
Average Ratio Excluding FY2020 1.21

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

Aside from the earnings, cash flow is another metric that should be included as part of the discussion of Snap’s cash dividend.

In this aspect, we should look at Snap’s operating cash flow as dividends are literally paid out of the cash generated by business operations.

If a business has failed to consistently generate any positive cash flow, it means that the business has failed to sustain itself, let alone a cash dividend.

That said, my method of estimating Snap’s net cash from operations is based on the cash conversion ratio as shown in the table above.

The cash conversion ratio is a measure of the linear relationship between non-GAAP earnings and net cash from operations.

For example, if the non-GAAP earnings are positive, the net cash from operations will almost likely be positive, and vice versa.

This approach may not be the most accurate especially when the non-GAAP earnings are a small number such as the one shown in fiscal 2020.

You can see that the deviation is huge for the FY2020 result.

But it is a quick and easy way to derive a reasonable figure for net cash from operations as most non-cash items such as stock-based compensation and amortization expenses are adjusted in the non-GAAP earnings.

All told, according to the table, Snap’s cash conversion ratio averages around 1.21 (excluding FY2020 result).

Using this ratio, Snap’s net cash from operations is estimated at slightly above $400 million for fiscal 2021.

Snap’s Projected Free Cash Flow

Fiscal Year Snap Net Cash From Operations ($ Millions) Snap Capital Spending ($ Millions) Snap Free Cash Flow ($ Millions)
FY2016 -$611 -$66 -$677
FY2017 -$735 -$85 -$820
FY2018 -$690 -$120 -$810
FY2019 -$305 -$36 -$341
FY2020 -$168 -$58 -$226
FY2021 $409 -$77 $332
Average Capital Spending Prior To FY2021 -$77

* Snap’s projected 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.
* Snap’s free cash flow and capital spending for fiscal 2021 are estimated figures

Once operating cash flow is known, we can proceed to estimate the free cash flow.

Why free cash flow?

The reason is that free cash flow is the cash left over after accounting for capital expenditures.

Using the net cash from operations alone to measure Snap’s cash dividend will not be sufficient because Snap may have other investments, including capital expenditures, which require a significant amount of cash payments.

Therefore, it’s only sensible to account for Snap’s capital expenditures in free cash flow to gauge the company’s ability to pay a dividend.

All told, Snap’s estimated capital expenditures come to about $77 million for fiscal 2021 and represent a 30% increment from the figure reported in fiscal 2020.

This figure is the average capital expenditures prior to fiscal 2021.

Additionally, this figure is quite reasonable given that Snap does not incur significant capital expenditures as the company uses third-party infrastructure partners to host its services.

Here is an excerpt extracted from Snap’s 2020 annual report regarding its free cash flow and capital expenditures:

  • Free Cash Flow
    We use the non-GAAP financial measure of Free Cash Flow, which is defined as net cash provided by (used in) operating
    activities, reduced by purchases of property and equipment.

    We believe Free Cash Flow is an important liquidity measure of the cash that is available, after capital expenditures, for operational expenses and investment in our business and is a key financial indicator used by management.

    Additionally, we believe that Free Cash Flow is an important measure since we use third-party infrastructure partners to host our services and therefore we do not incur significant capital expenditures to support revenue-generating activities.

    Free Cash Flow is useful to investors as a liquidity measure because it measures our ability to generate or use cash. Once our business needs and obligations are met, cash can be used to maintain a strong balance sheet and invest in future growth.

All in all, Snap’s free cash flow for fiscal 2021 comes to about $332 million after accounting for the $77 million allocated for capital expenditures.

Snap’s Dividend Payout Ratio For 1% Yield

Fiscal Year Snap Projected Dividend Payout For 1% Yield ($ Millions) Snap Projected Earnings ($ Millions) Snap Projected Free Cash Flow ($ Millions) Snap Dividend To Earnings Payout Ratio (1% Yield) Snap Dividend To Free Cash Flow Payout Ratio (1% Yield)
FY2021 $1,080 $340 $332 318.2% 325.2%

* Snap’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 non-GAAP net earnings.
* Snap’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.

After having the non-GAAP earnings and free cash flow figures for fiscal 2021, we can proceed to calculate Snap’s dividend payout ratio with respect to these metrics.

As shown in the table above, Snap’s estimated dividend payout for a 1% yield will come to about $1 billion USD.

Against the non-GAAP earnings and free cash flow figures of $340 million and $332 million, respectively, Snap’s dividend payout ratios come to more than 300%.

At this level of payout ratio, Snap’s cash dividend of $1 billion looks extremely excessive and stretched out, a figure that is more than 3X higher than the FY2021 projected earnings and free cash flow.

If Snap were to go ahead to pay out this amount of cash dividend, the company probably needs to take on debt and/or raise capital through equity issuance.

While Snap may have $2.5 billion of cash on hand as of fiscal 4Q 2020 according to this article: Snap’s Net Debt And Cash On Hand, the company also carried as much as $2.7 billion of long-term debt as of the same fiscal quarter, thereby totally canceling out the cash reserves the company has.

Therefore, Snap is financially incapable of paying out such a massive cash dividend to shareholders for fiscal 2021 based on the estimated earnings and free cash flow despite having a gigantic cash position.

In addition, it also does not make sense for any company to pay a cash dividend that is more than 3X higher than the projected earnings and free cash flow.

For now, Snap’s 1% dividend yield for a stock price of $70 per share looks unrealistic and will definitely not play out for investors hoping for a cash dividend by the end of fiscal 2021.

Snap’s Dividend Payout Ratio For 0.1% Yield

Fiscal Year Snap Projected Dividend Payout For 0.1% Yield ($ Millions) Snap Projected Earnings ($ Millions) Snap Projected Free Cash Flow ($ Millions) Snap Dividend To Earnings Payout Ratio (0.1% Yield) Snap Dividend To Free Cash Flow Payout Ratio (0.1% Yield)
FY2021 $108 $340 $332 31.8% 32.5%

* Snap’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 non-GAAP net earnings.
* Snap’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.

While Snap seems to be incapable of paying a cash dividend that yields 1%, how about a dividend that yields only 0.1%?

At only a 0.1% yield, Snap’s dividend per share will come to only $0.07 USD per share.

The $0.07 cash dividend per share translates to about $108 million in cash payment for fiscal 2021 as shown in the table above.

Against an earnings and free cash flow figure of $340 million and $332 million, respectively, Snap’s estimated dividend payout ratio will come to slightly above 30% for both metrics.

At this level of payout ratio, the dividend seems affordable for Snap.

That said, Snap will have a cash leftover of more than $200 million after paying the dividend.

Therefore, that seems workable for Snap and even realistic as the company is still left with $200 million of cash that can be put to good use for other purposes, including investment and debt repayment.

If Snap’s projected earnings and free cash flow for fiscal 2021 turns out to be even better, the case of a cash dividend that yields 0.1% looks even more justified.

Conclusion

Can Snap afford to pay a cash dividend that yields 1% at a stock price of $70 per share?

Definitely not.

Snap will go bankrupt for returning a capital that totals more than $1 billion to shareholders for fiscal 2021.

For this case to play out, Snap will need to earn at least $2 billion in adjusted earnings and free cash flow for fiscal 2021.

While a 1% cash dividend yield seems far-fetched for Snap, a 0.1% cash dividend yield looks reasonably practical for the company.

At a dividend yield of 0.1%, Snap needs to pay out only slightly more than $100 million in cash and will still be left with an estimated $200 million of free cash flow.

While a 0.1% dividend yield may seem little, it’s better than none for Snap’s existing shareholders as price appreciation of the stock has been the only option for them.

For now, Snap is a non-cash-dividend-paying stock, it’s as simple as that.

Credits and References

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

a) Snap Investor Relations
b) Yahoo Finance

2. Featured images in this article are used under creative commons license and sourced from the following websites: Pudong, Shanghai and Yellow Tulips.

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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.

If you find the information in this article helpful, please consider sharing it on social media and also provide a link back to this article from any website so that more articles like this one can be created in the future.

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