Snap has gone public for more than 5 years after completing its IPO in March 2017.
However, the company has never declared or paid any cash dividends since its public listing.
The following excerpt extracted from the 2022 annual report shows what Snap has said about its dividend policy:
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 in 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 Meta, Pinterest, 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 extent.
That said, in this article, we are exploring the possibility of Snap paying or not paying a cash dividend based on several factors.
So, let’s look at the following scenarios.
A Growing DAU
A growing DAU or daily active user is probably the most important metric that could support a dividend coming from Snap Inc.
For your information, the DAU metric measures users’ engagement on Snapchat.
Therefore, the higher the DAU number, the more engaged the users are on Snap’s social media platforms, and of course, the more money Snap will make.
As we all know, Snapchat’s revenue source comes primarily from advertising impressions shown on its social media platforms.
An increasing number of users and a growing user engagement on its platforms, as seen in the growing DAU across all regions, would allow Snap to display more advertisements and thus be able to grow its revenue.
The good news is that Snap has been able to increase its DAU numbers in all regions as shown in the chart above, particularly for its international user base which has now overtaken that of its North American as well as its European counterparts.
While Snap’s DAU in all regions reached record highs as of 2022, it was only a fraction of the figure obtained by Facebook, according to this article – Facebook Vs Snap In DAU Comparison.
As seen, Snap’s DAU on a global basis as of Q4 2022 was only about one-fifth of that obtained by Facebook during the same period.
And, Snap is still a relatively young social media company compared to Facebook.
Therefore, there is definitely plenty of headroom for Snap to grow its DAU in the future.
Certainly, a growing DAU will be a boost to Snap’s revenue and subsequently, the probability of a cash dividend coming from it.
An Increasing ARPU
Another important metric that could possibly increase the chance of a dividend from Snap is the ARPU or average revenue per user.
As the name implies, the ARPU measures the revenue per user earned.
Therefore, the higher the ARPU, the more revenue Snap will collect for a user on its platforms.
As shown in the chart above, Snap’s ARPU has been on the rise across all regions in the world and Snap’s North America region has done particularly well compared to other regions.
The increasing revenue per user for Snap bodes well for the company as it means that Snap’s revenue will certainly rise in accordance with the growing ARPU.
While Snap’s ARPU has reached record highs in all regions as of 2022 as seen in the chart above, it was only a fraction of the numbers obtained by Facebook, a more mature social media company.
For example, Snap’s North America ARPU of $32.60 USD reported in 2022 was only one-sixth of the figure obtained by Facebook in the same period, according to this article – Snap Vs Facebook In Revenue Per User.
As Snap is still relatively a young social media company, it has a lot of headroom to grow its ARPU and it may attain the same level as Facebook when it becomes a more mature social media platform in the future.
Again, Snap’s growing ARPU can certainly help to make the case for a cash dividend a reality.
Rising Revenue In All Regions
The growing DAU coupled with the increasing ARPU has enabled Snap to grow its revenue in all regions as shown in the chart above.
As seen, Snap’s revenue in all regions has been on a rise and reached a record high as of 2022.
While a cash dividend may not necessarily come from revenue, the soaring sales figures could certainly increase of probability of Snap becoming a cash dividend-paying stock.
Cash Flow Positive
Apart from the growing revenue, Snapchat also has become cash flow positive in recent years as shown in the chart above.
As seen, Snap managed to generate net cash from operations of $300 million and $185 million in 2021 and 2022, respectively.
Similarly, Snap’s free cash flow has become positive and soared to $223 million and $55 million in 2021 and 2022, respectively.
These are important milestones for Snap Inc. as the company has turned from being cash flow negative to cash flow positive.
While these figures may not necessarily be impressive compared to the billions of cash produced by a more mature company, they represent a critical turnaround for the company in terms of cash flow.
When Snap is able to generate positive operating net cash and free cash flow, it means that the company is no longer operating a cash-burning business and can possibly be self-sufficient in terms of working capital.
Therefore, Snap will have the option of relying less on external capital injection and can definitely borrow less on debt when it is capable of producing excess cash.
The excess cash can be used on debt repayment and for re-investment and even as a capital return to stockholders in the form of share buyback and cash dividends.
Therefore, it is incredibly important for a dividend company to produce positive cash flow.
In short, Snap’s positive cash flow is a step forward and makes the case for a cash dividend even more compelling.
Snap Can Service Its Debt
While Snap’s debt level and leverage are high, it is capable of servicing the interest expense as shown in the chart above.
As seen, Snap’s interest expense coverage with respect to the adjusted EBITDA is extremely low in 2021 and 2022, notably at only 3% and 6%, respectively.
At these ratios, Snap’s interest expense represents only a tiny fraction of the adjusted EBITDA.
While Snap may not necessarily be able to service its debt based on certain GAAP metrics such as the operating profit, they contain a lot of non-cash expenses, especially depreciation, and amortization as well as stock-based compensation expenses, that do not have an impact on cash flow.
Therefore, the adjusted EBITDA, which takes out all non-cash expenses, is the cash earnings that focus only on cash items.
From the perspective of the adjusted EBITDA, Snap Inc. is capable of covering its interest expenses by a huge margin as shown in the chart above.
Since debt servicing is not a drag on the company’s financial health, it adds to another reason that Snap should initiate a capital return to shareholders in the form of cash dividends.
Snap Is Unprofitable
While Snap has been cash flow positive, it is still not a profitable company as shown in the chart above.
In fact, Snap Inc. has not been able to make a decent profit in the last 7 years since 2016 and the losses have become even worse in 2022.
However, profitability may not necessarily be a requirement for a dividend-paying company as cash dividends come primarily from cash and not profit.
But the continuous unprofitable nature of Snap does not look good to investors.
Moreover, Snap’s years of unprofitability will eventually become a liability to its cash flow.
Therefore, Snap Inc. needs to be making decent profits before even thinking about a capital return to investors.
The good news is that Snap’s cash earnings, the adjusted EBITDA, have already shown signs of improvement in recent years.
As seen in the chart above, Snap’s adjusted EBITDA has been on a rise and came in at several hundred million since 2021.
Therefore, if Snap’s adjusted EBITDA can continue to soar, Snap’s unprofitability may eventually become a thing of the past going forward.
When Snap can make a decent profit on a GAAP level, a cash dividend may soon be within reach among investors.
High Debt Level And Leverage
While Snap is capable of servicing its indebtedness, its debt level and leverage have grown significantly over the years as shown in the chart above.
As seen, Snap’s total debt was at a record high of $4.2 billion USD as of 2022, an increase of more than 200% from the number reported in 2019.
As Snap’s total debt has been on a rise, its leverage also has been trending up in accordance with the rising debt level.
For example, Snap’s debt-to-equity ratio reached a massive 162% as of 2022, a record high since 2019.
At this level of leverage, Snap carries about $1.62 dollar of debt for every $1.00 dollar of equity.
Similarly, Snap’s total debt reported in 2022 made up 52% of the company’s total assets.
In other words, the majority of Snap’s assets were actually financed by debt.
These ratios indicate a high debt level and high leverage for Snap.
The good news is that Snap’s total debt and leverage are still at a manageable level as seen in the prior interest expense coverage ratio.
However, if Snap’s debt level and leverage continue to soar in the future, it may face a liquidity issue when it is no longer capable of servicing the interest expenses.
Besides, certain credit agreements and debt arrangements may restrict Snap from paying a dividend when the debt level and leverage are high.
Therefore, if Snap ever wants to consider returning cash to shareholders, it must maintain its debt and leverage at a reasonable level.
There seem to be more factors that support a cash dividend coming from Snap.
Therefore, should Snap become a cash dividend-paying stock?
Please leave your comments below.
References and Credits
1. All financial figures in this article were obtained and referenced from Snap’s filings, reports, and statements which are available in Snap Inc. Shareholder Information.
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.
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