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Why Twitter Could One Day Become a Dividend Stock

Why Twitter Could One Day Become a Dividend Stock

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Friday, 20 December 2019 04:38 PM Current | Bio | Archive

Social media has come a long way in the past decade. An entire industry was born seemingly overnight, but is now led by a few massive platforms such as Facebook (FB) and Twitter (TWTR). The giants of social media have grown so fast, that they now generate billions in revenue every year.

Investors might assume that neither Facebook or Twitter could possibly pay a dividend to shareholders. But Facebook and Twitter are no longer startups. They are both solidly profitable, with strong balance sheets and continued growth potential. This article will discuss why Twitter could one day pay a dividend.

Business Overview and Growth Prospects

Twitter is a social media giant. It ended the most recent quarter with 145 million monetizable daily active users. The platform allows users to discuss anything that interests them, in short statements rather than maintaining full profiles. Twitter is still very much a growth company; monthly monetizable DAUs increased 17% last quarter, year over year.

Of course, it is not enough to just grow users. Social media sites must also demonstrate that they are a valuable platform for advertisers, which is critical to their revenue generation. Twitter has been successful in this regard as well. Revenue increased 9% in the most recent quarter, and by 15% over the first three quarters of 2019.

Along with its revenue growth, Twitter has reached consistent profitability. Diluted earnings-per-share totaled $1.72 over the first three quarters, up 40% from the same period last year. User growth, in conjunction with product improvements, have allowed Twitter to become a highly profitable company. And, thanks to a strong balance sheet, these key factors could mean Twitter will one day join the ranks of dividend stocks.

Why Twitter Could Theoretically Pay A Dividend

Many companies, including Twitter, do not pay dividends to shareholders. This is especially common in the technology sector, a highly cyclical and fiercely competitive industry. Tech companies often need to reinvest a much higher level of cash flow back into the business, in order to stay ahead of rapidly-changing trends.

The social media industry was once a collection of various startups, but over the past decade the industry has matured. There are only a few companies that dominate the industry now, Twitter being one of them. The economics of the social media industry have improved so that companies like Facebook and Twitter are highly profitable.

As the industry has matured and competition has consolidated, Twitter does not need to spend all of its cash flow to sustain its growth. The company generated free cash flow of $637 million through the first nine months of 2019. It can use this free cash flow to pay down debt, repurchase stock, or to pay dividends if it chose to.

Plus, Twitter has a clean balance sheet. The company ended the most recent quarter with $5.8 billion in cash and marketable securities. It has just $3.2 billion in total debt. It also has a current ratio of 8.7, meaning it has 8.7 times more current assets than current liabilities. Being in such strong financial condition is an added argument for paying a dividend.

The Bottom Line

Twitter is a $25 billion company by market capitalization. It is highly profitable, with impressive cash flows and a rock-solid balance sheet. All of this implies that Twitter could, in theory, pay a dividend to shareholders.

That said, company management must also possess a willingness to pay a dividend. Just because it is financially justified, does not necessarily mean the company will act in the way its investors would like. While Twitter’s financials justify a dividend, investors should still not expect one for the foreseeable future, as management has given little if any willingness in recent years.

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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BenReynolds
Social media has come a long way in the past decade. An entire industry was born seemingly overnight, but is now led by a few massive platforms such as Facebook (FB) and Twitter (TWTR).
twitter, dividend, stock, yield
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2019-38-20
Friday, 20 December 2019 04:38 PM
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