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Tesla Investors, Don't Expect a Dividend Any Time Soon

Tesla Investors, Don't Expect a Dividend Any Time Soon
Picture shows the front of US automaker Tesla's latest car "Model 3" during its first exhibition day in Spain, at the Tesla's store in Barcelona on November 14, 2018. (Josep Lago/AFP/Getty Images)

By Thursday, 13 December 2018 04:04 PM Current | Bio | Archive

There are good reasons for investing in growth stocks like Tesla, Inc. (TSLA), primarily the potential for outsized returns. Tesla had its initial public offering on June 29, 2010, closing that day at a share price of $23.89 per share. Investors who bought at that price have seen their investment rise by more than 15-fold, for a rate of return in excess of 40 percent per year over the past eight-plus years.

That said, growth stocks like Tesla typically do not pay dividends to shareholders. Instead, any excess cash flow is likely to be reinvested back into the business, to continue generating growth. Income investors primarily looking for dividends should look elsewhere, as Tesla is not likely to pay a dividend any time soon.

Dividends: How and Why a Company Pays

A dividend payment is a return of a portion of a company’s profits to shareholders. As a business owner, shareholders are entitled to the residual profits of a company. That means after all a company’s bills and taxes are paid, and its debt requirements are satisfied, a company may decide to pay a dividend to shareholders. Consider some of the tried-and-true dividend stocks, such as the Dividend Aristocrats.

For example, healthcare giant Johnson & Johnson (JNJ) is a Dividend Aristocrat. It has increased its dividend for 56 years in a row, thanks in large part to its highly profitable business model which easily affords a return of capital to shareholders. Johnson & Johnson expects to generate earnings-per-share in a range of $ $8.13 to $8.18 per share for 2018. The company currently pays an annual dividend of $3.60 per share. This means J&J is likely to distribute roughly 44 percent of its earnings to shareholders this year, made possible because of the company’s strong profits.

Shareholders are not guaranteed a dividend just because a company makes a profit; there are many highly profitable companies that do not pay dividends, instead preferring to reinvest excess cash flow to grow the business.

Dividends are more commonly found among large companies in mature industries, that are highly profitable and have manageable capital investment needs. By contrast, growth stocks at the early stages of development simply cannot pay a dividend. These types of firms need to utilize every dollar possible to invest in growth, particularly in hyper-competitive and cyclical industries such as technology.

For these reasons, Tesla has not paid a dividend since its IPO, because the company has not achieved consistent profitability. For example, last year Tesla generated revenue of $11.8 billion, but generated a net loss of $1.96 billion. On a per-share basis, Tesla lost $11.83 per share in 2017. Losses have persisted this year. Over the first three quarters of 2018, Tesla reported a net loss of $6.56 per share.

Tesla’s losses could moderate this year from 2017. But as long as a company continues to lose money, it cannot pay a dividend to shareholders. After all, a company cannot distribute money it does not have. Because of its consistent losses over the past decade, Tesla has had to raise debt and sell stock to fund its growth. The company now has $23.41 billion of total debt on the balance sheet, including $9.67 billion of long-term debt. A bloated balance sheet means debt repayment precludes dividend payments for the foreseeable future.

Don’t Expect a Tesla Dividend

Tesla has generated a great deal of excitement, both for its revolutionary products and its amazing stock price performance since its IPO. However, income investors should not buy the stock in anticipation of a dividend. Tesla is not likely to pay a dividend for at least the next several years, and it might never. At the very least, Tesla needs to demonstrate consistent profitability from year to year, to give management the confidence to initiate a regular dividend.

A special dividend from Tesla is not entirely out of the question. A one-time special dividend would be a way for Tesla to return some cash to shareholders, without the obligation of maintaining a regular quarterly dividend. This would give management some flexibility in the event of a business downturn.

Still, in either case Tesla’s financial performance would have to improve drastically before any distribution is made to shareholders. With recurring losses and mounting debt, Tesla might have enough trouble satisfying its obligations to debtholders, let alone rewarding shareholders. Don’t expect a dividend from Tesla any time soon.

Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.

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There are good reasons for investing in growth stocks like Tesla, Inc. (TSLA), primarily the potential for outsized returns.
tesla, dividend, stock, profitability
Thursday, 13 December 2018 04:04 PM
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