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E-commerce giant eBay Inc. broke from the convention last week by announcing its first-ever dividend as a publicly-traded company. Naturally, investors are curious about the company’s payout policy.
Let’s take a look at the rationale behind such a move and its implications for investors.
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Founded in 1995 by Pierre Omidyar, eBay quickly emerged as the premier e-commerce platform for consumer-to-consumer and consumer-to-business sales. In 1998, the company rode the dotcom wave to a successful initial public offering (IPO), where it distributed 3.5 million shares at a price of $18.00 a unit. Twenty-three years later, eBay’s share price has barely doubled its IPO price and is currently trading well below its all-time high of $44.30.
The company’s share price fell hard in 2015 after it decided to split from internet payment service PayPal in favor of Adyen, a lesser-known rival. While eBay and PayPal have negotiated terms through 2023, they do not extend the previous agreement, which expires in 2020.
eBay’s first-ever dividend was announced on Jan. 29 by Devin Wenig, the company’s chief executive officer. As per the announcement, eBay will initiate a dividend of 14 cents per share while adding $4 billion to its stock repurchase program. In total, the company is planning to return roughly $5.5 billion to shareholders in 2019. The share buyback program is not unlike the one the company’s board approved back in 2017, which was valued at $3 billion.
The current move, like the share buyback in 2017, was intended to appease activist investors who are pressing the company to add more value to their holdings. Despite caving to the pressures, Wenig stopped well-short of selling StubHub and other parts of the company, something activist investor Elliott Management Corp. was pushing for earlier in January. About a week before the dividend was announced, Elliott Management had issued a letter to eBay’s board of directors where it outlined “urgently needed” steps to boost the company’s value.
Wenig implied that the company’s expansion will be slow at first, with 2019 set to be a year of transition. This will pave the way for accelerated growth in 2020 and beyond.
“eBay has never had more buyers, business sellers or inventory in its history,” he said on a conference call with analysts, according to Bloomberg. “We feel strongly about our ability to deliver value now and in the future.”
With that optimism, the company issued better-than-expected earnings guidance for the first quarter. Earnings, excluding some items, will likely be between 62 cents and 64 cents per share in the first quarter, slightly higher than the 61 cents per share forecasted by analysts. Adjusted earnings amounted to 71 cents per share in the fourth quarter, also surpassing estimates.
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The dividend marks a pivotal transition for eBay as it embarks on a period of expansion followed by steady revenues and profitability. If eBay can follow in the footsteps of Starbucks Corp. (SBUX ) and Amgen Inc. (AMGN ) – other large companies that have become successful dividend payers – it could attract a new breed of income investors that seeks long-term growth and sustainability.
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While dividend payouts will allay investors’ fears about lackluster growth in an increasingly crowded marketplace, the new policy doesn’t address the myriad of issues facing the company. Some of these challenges include outdated buyer/seller systems, the rising dominance of Amazon (AMZN) and Google’s (GOOG) elusive algorithm. As Wenig noted back in 2016, his company is “trying to bring more sustainability in search results.”
Click here to see why e-commerce companies don’t pay a dividend.
eBay’s entry into the dividend-paying world offers more opportunity for yield-seeking investors looking to capitalize on a high-growth industry. However, the shift in policy is insufficient to address the concerns of activist investors who have been losing patience in the company’s direction.
Click here to learn about warning signs for dividend investors.