In this week’s analysis, 7IM investment writer, David Freitas, reflects on the news that Meta has declared its first ever dividend to consider the importance of dividends and of a company’s dividend strategy as follows:
Last week we were talking about how important it is to reinvest your dividends. Of course, that requires getting a dividend in the first place.
Extremely topically, Meta (the artist formerly known as Facebook) just celebrated its 20th birthday by announcing its first ever quarterly dividend.
This is particularly good for their largest shareholder, who will take home $700m a year from this dividend distribution – guess he needs it to buy all that suncream:
Mark Zuckerberg, Meta’s largest shareholder, staying sun-safe while surfing. Source: The New York Post
Other shareholders welcomed this news too – in fact, Meta’s share went up 20% on the back of the announcement, reaching a record high.
And it does make sense. Dividends are a strong driver for shareholders to invest in a company. When a company offers a dividend, it’s making a statement: “Business is booming, and while we’ve reinvested some of our earnings into the business, we’re also rewarding our shareholders by giving some of their investment back.”
BUT there’s also a serious risk associated with dividend distributions. When a company pays out a dividend, it is also creating an expectation of more to come.
And once you start paying out, it’s very hard to stop.
Take Kodak (remember them?!). At the start of the millennium, Kodak had a choice to make. It had been giving investors a quarterly dividend for decades, and as of 2003 had paid 44 cents (a 7% yield) per quarter for six years in a row. Nice and reliable.
But the world was changing. Going digital.
To keep up, Kodak needed to reinvest in technology to stay competitive. It needed cash.
In October 2003, it cut its payout to 25 cents (a 43% decrease). The announcement led to a share price plunge of 18% in a single day.
Source: Bloomberg
By April 2009, there were no dividends, and in 2012, Kodak declared bankruptcy.
Dividend payouts are a bit like Pringles. Once you pop … you really can’t stop. Something to watch at Meta over the next few years!
