One question that I think is imperative that any investor knows the answer to is whether or not the company that they’re looking to invest in is going to pay them a dividend. This might seem like a rudimentary question to some people but I personally know some investors that don’t know it. So why not take a little bit of a dive into one of the most popular stocks, Tesla, and ask ourselves – does Tesla pay dividends?
It might seem like a stretch to say that Tesla is the most popular stock but they actually were ranked as the #1 most popular Nasdaq stock in 2020. Now, I’m not shocked at all about this because not only is the Nasdaq a stock index that’s built up of tech companies, but Tesla also had 743% returns in 2020, which is honestly just the most insane thing ever.
But do you know what their total returns were in 2020? They were also 743% – what a coincidence! And that’s because Tesla does not currently pay a dividend as of August 2021. Now, is it something that might change?
Maybe – but I would be skeptical. Let me explain a little bit of background before giving my thoughts and reasonings on the subject.
When a company makes money, they really have 5 options for what they can do with their earnings:
Invest in their Business
This could be in various ways. Potentially you’re going to pay to maintain infrastructure or build up IT, or even give out bonuses to help improve employee morale, but I would essentially describe this as protecting your moat that the company has, to not give any opportunity to competitors to sneak in.
This is an obvious option for businesses. They can always pay down their debt but depending on the interest rates of that debt, they very well may choose to not only paydown their debt but also even take out more debt. As interest rates change, their decisions also will likely change as well as to whether this is a quality option or not.
Grow the Business
Growing the business is similar to investing in the business but I think of this as more on the offensive rather than the defensive. For instance, maybe the company is going to move into a new market, develop a new product, or even purchase a new company. In the case of Tesla, maybe they want to buy a new production facility so they can get their cars to their consumers much faster.
Buy Back Shares
This is always a great option for shareholders because when shares are bought back, your piece of the pie is now effectively becoming larger. I won’t go into depth on this because I have done so before and Andrew has an A+ piece of work on this topic but I do want to give a quick example – if a company were to buy back 10% of their outstanding shares, that essentially means that your share are worth more money.
The chart below shows what happens if a company were to purchase 10% of their shares back:
EPS stands for Earnings Per Share and is a very common metric for how much earnings each share is generating. The higher the number, the more valuable those shares are. For instance, if a stock normally trades at a 20 P/E (Price/Earnings), that would mean that each share price should theoretically be 20x whatever the EPS is.
So, if a company generates $4 EPS then the share price should be around $20, as $4*20 = $80.
Now, if this company buys back 10% of their shares, then there are now less shares but the same earnings, meaning the EPS increases to $4.44. This would then translate to your shares being with $88.80 as $4.44*20 = $88.80.
In other words, the company can buy back some of these shares and create value for their shareholders.
Pay a Dividend
The last option that Tesla has is that they can pay dividends. We at Investing for Beginners absolutely love dividends because it’s great to get cash in hand from companies so you can reinvest it and buy even more shares, but I won’t go into that because we’ve also done that numerous times.
When a company pays a dividend, they’re basically thanking you for being a shareholder and letting you partake in profits. Think of it as profit sharing with a publicly traded company. In that same example I used above, if they have $4 in EPS and pay out 50%, then you’re going to get $2/share – not bad at all!
While this information isn’t directly relevant to IF Tesla currently pays a dividend, I believe it’s imperative if you want to understand the reasons why they don’t, and potentially identify if and when they might begin to pay one.
So why doesn’t Tesla pay a dividend? Well, there’s quite a few reasons for this. The number one reason is that Tesla is still very much in the growth stage of their business. As you can see from the chart below from Macrotrends, they’re really just now getting to the point where their revenues are ramping up:
When a company is so young, and their goal is to try to grow as fast as possible and take market share, the last thing that they’re going to want to do is to pay out a dividend.
While a dividend is good to reward shareholders, and by doing this they will organically create demand in the company shares, that does very little good for Tesla at this point in their life. Tesla needs to take any money that they make and rapidly reinvest that money right back into the business. By putting that money back into the business, they can continue their growth and potentially even acquire another company to expand their product offering or help them grow faster.
For this reason, you typically will see dividends given by companies that have long, established track records of sustainable (and hopefully growing) revenues and profits, and are likely in a slower stage of life than these newer, growth companies. Typically dividends will be with a lot of value companies which are typically slower growing companies.
Take a look at this chart below from CNBC which shows the best dividend paying sectors:
I sorted the chart on the highest yield and we see a lot of the typical sectors sitting at the top with Technology and Consumer Discretionary really hitting the lowest end of the yield. To me, this makes perfect sense because you typically will see those companies growing faster.
Along a very similar line of revenue, a major reason that Tesla doesn’t pay dividends is because they quite honestly just started making money recently. As you can see below from Macrotrends, their first profitable 12-month period occurred in Q1 2020.
Now, they have had some profitable quarters before then as I have shown below, but those quarters have been minimally profitable, and then we see things start to tick down as the losses expand:
Now, I really don’t want this to seem like I’m dunking on Tesla because I honestly am not trying to do that whatsoever. Tesla is a younger company that is growing as fast as they can, capturing market share, and now they’re working to monetize their business. I actually think this is very smart of them and they’ve done a good job issuing shares along the way to capitalize on their insane share prices to keep cash liquid in the business.
In fact, I think their process has been very similar to one of my favorite speculative companies, ROKU, which has continuously been reinvesting back in their business to grow their market share. They kept putting that money to work to fight off major competitors like Amazon and continue to grow their revenues and are now starting to monetize those revenues. Below shows their revenues and then their profits:
If you’re going to be investing in one of these speculative growth companies, the last thing that you’re going to want is for that company to pay dividends. Quite honestly, it’s going to completely contradict the core strategy of the business.
One thing that I caution is that it’s very easy when looking at speculative growth companies to turn a blind eye to the financials because you believe in the long-game, and this is something that I have caught myself doing before; but it’s imperative to take a look at the numbers and make sure you understand what’s happening.
For instance, one of the most important ratios that I like to look at is Return on Invested Capital, or ROIC. ROIC will tell you the total return that the company has received when they reinvest their money back in the business.
In essence, I use ROIC to tell me how effective the management is at making decisions to further grow the company in the future. If their ROIC is high, that means that they’re making great decisions and are continuing to build their moat.
If the ROIC is low, say 5%, that means that the company is generating $.05 in return for every $1 that they put back in the company. While that might not sound like an insanely bad amount, that’s not necessarily anything that gets me excited.
I found the TSLA ROIC numbers on one of my all-time favorite sites, Macrotrends (as you could’ve likely guessed), and then charted that data out as I am a very visual person:
As you can see, their ROIC has really hovered right around 0% but it’s been starting to strengthen as you can see from their last few quarters:
Again, ROIC is definitely not an end all, be all to the analysis that I will do, but it is a very important piece to me when looking at companies to invest in.
In fact, Andrew and Dave have recently talked about this quite a bit and I think it’s a fantastic rabbit hole to stumble down if ROIC is a new topic for you. Check out these few pieces:
- How an ROIC Tree Shows a Company’s Growth Drivers and Capital Efficiency (einvestingforbeginners.com)
- Predicting the Possibility of New Market Entrants Using ROIC (einvestingforbeginners.com)
- Everything to Know about ROIC, with Average ROIC by Industry Data (einvestingforbeginners.com)
So, at the end of the day, no, Tesla doesn’t pay a dividend, and I don’t think they will or should for a very long time. In fact, if their ROIC continues to increase, you can absolutely make the argument that Tesla paying a dividend is them slowing their potential growth.
Personally, I would much rather have a company reinvest their income back into the business if they can sustainably grow at 20%+ over paying me a small dividend. But not all companies are able to attain this sort of growth and truthfully, it’s not the goal of a lot of companies.
For instance, companies in the Oil & Gas sector are not going to be those that are going to go out and grow their business as rapidly as they can. They have large, expensive assets on their balance sheet and truthfully are in an industry that is facing a ton of competition. I think of them as being a “cash cow” and one that I would be ok with milking for the dividend as long as you also liked some of their future sustainability efforts, but you’re absolutely not going to see a major oil driller change their entire business model and start producing EVs. It just won’t happen.
Instead, understand that you should hold different types of companies within your portfolio and they don’t all have to pay a dividend. Most speculative stocks will not be paying a dividend, but if you’re looking for something that has rapidly grown over time and still pays a dividend, I have an idea…