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Why Doesn’t Facebook Pay Dividends?

When it comes to investing, very few sectors offer the same growth appeal as technology. But for value investors in search of yield, the tech juggernauts aren’t nearly as attractive. After all, they are missing out on billions of dollars in foregone dividend payments.

From Wall Street to Main Street, it is a well-known fact that dividend payments are the ire of tech companies. That’s why so few of the leading tech juggernauts either refuse to pay them or spend decades in dividend purgatory. For Facebook (FB ) and other social media stocks, dividends simply aren’t feasible at this stage in their development. This certainly isn’t unique to Facebook, but the technology sector as a whole. Companies like Microsoft (MSFT ), Apple (AAPL ) and Oracle (ORCL ) spent decades in the dividend abyss before issuing their first payout.

In the case of Microsoft – a company that went public in 1986 – it took 18 years before investors began receiving dividend payments. Apple initiated its initial public offering (IPO) in 1980, but waited another 32 years before giving investors dividends. Oracle investors received no dividend for the first 23 years the company was publicly traded.

One of the rare exceptions to the above is IBM (IBM ). The hardware company IPO’d in 1913, and has been paying dividends ever since. It has successfully increased its dividend payments in each of the past 17 years, making it one of the sector’s best dividend plays.

Income investors looking for more frequent payouts may want to consider monthly dividend stocks. Unlike their quarterly counterparts, these companies pay dividends 12 times each year.

Facebook’s Business Strategy

As a maturing company, Facebook has shown great resolve in diversifying its business. The company has successfully grown its mobile ad revenue, overcoming fears of maximum ‘ad load.’ A number of key acquisitions, including WhatsApp and Oculus VR, give Facebook a strong foothold in its core social media business as well as the rapidly expanding field of virtual reality. Growth via acquisitions continues to be one of Facebook’s core business strategies.

An extensive focus on the end-user experience is also driving Facebook’s business growth. Unlike failed social media platforms before it, Facebook continues to enhance the user experience while adding a host of new features to its platform. This ties in to the company’s focus on new product development.

Fears of a declining user base have also been overblown – at least, for now. Nearly 2 billion people log onto Facebook every month, with more than 1.2 billion using the social media network every day. A billion of the site’s daily active users access Facebook on their phones or tablets, making the mobile arena a major cog in the company’s future.

Facebook’s business strategy, combined with its strong user base, give the company new avenues of monetization. This is both an exciting and intriguing time for Facebook investors, as well as those who feel they missed the boat on the IPO.

It remains to be seen whether growth and business diversification will eventually translate into dividend payouts. Theoretically, the company has over $20 billion in available cash that can be used for the purpose of dividends, acquisitions, research and development, and other business functions. Analysts expect the company to earn $6.59 per share in FY 2018, putting it on par for a theoretical payout ratio of roughly 40%, which is right around the average for S&P 500 companies.

That being said, investors shouldn’t be too concerned by Facebook dragging its feet on the dividend front. The company IPO’d just five years ago, giving it plenty of time to catch up to its more established technology peers.

Facebook’s lack of dividend payments mirrors Google’s strategy. To learn more about why Google doesn’t pay a dividend, click here.

Are you a dividend investor? Find out the ex-dividend dates by stock type and date range by clicking here.

The Bottom Line

Will Facebook pay dividends in the future? If history is any indication, there’s a strong possibility it will follow in the footsteps of Microsoft, Apple and Oracle, but this could take many years to materialize. In fact, the author does not expect this to happen for at least another five years or more. Until then, investors should enjoy Facebook’s strong growth prospects and assess the company’s plan to diversify its revenue.

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