Updated on May 17th, 2022 by Aristofanis Papadatos
Lyft, Inc. (LYFT) made its widely-expected initial public offering, or IPO, in March-2019 at a price of $72. Since then, the stock has plunged 74% and has disappointed its investors due to its dramatic under-performance compared to the broad market.
The collapse of the stock price has occurred due to the coronavirus crisis but also due to the inability of the company to live up to the exceptionally high growth expectations that prevailed during the IPO process.
However, the company is only in the very early phases of a multi-year growth trajectory and is growing its revenues at a high rate. And it still has promising growth prospects up ahead. Nevertheless, it is natural for income-oriented investors to wonder whether Lyft will ever pay a dividend.
Lyft does not currently pay a dividend, which is fairly common among growth stocks, particularly those in the technology sector. Income investors are much more likely to consider high-quality dividend growth stocks such as the Dividend Aristocrats, a group of 65 stocks in the S&P 500 with 25+ years of dividend increases.
You can download an Excel spreadsheet of all 65 Dividend Aristocrats (with metrics that matter such as dividend yields and price-to-earnings ratios) by clicking the link below:
Investors interested in buying shares of Lyft may also be interested to know whether the company will pay a dividend anytime soon. While there is always a chance a company could initiate a dividend down the road, Lyft still has a long way to go on its journey before a dividend is a real possibility.
Lyft operates a marketplace for on-demand ride-sharing in the U.S. and Canada. The company was founded in 2012. Today, it has nearly 20 million active riders and 2 million drivers.
Lyft benefits from a strong secular trend, which supports its business model. The world is at the very early stages of shifting away from car ownership towards transportation-as-a-service. About 35% of Lyft users do not own a car. The company also estimates that about 300,000 people have got rid of their cars because of Lyft.
Lyft faced a fierce downturn due to the coronavirus crisis, which greatly reduced economic and social activity, including the demand for transportation. However, thanks to the massive distribution of vaccines and the immense fiscal stimulus packages offered by the government, the economy has recovered from the pandemic. As a result, Lyft has returned to growth mode.
In the first quarter, Lyft saw the number of its active riders grow 32% over last year’s quarter thanks to a combination of new and returning riders.
Source: Investor Presentation
It also saw its revenue per active rider grow 9%, to a level that is just 5% off the peak level recorded in the fourth quarter of 2021.
Thanks to its strong performance, Lyft grew its revenue 44% and exceeded its own guidance by a wide margin.
Source: Investor Presentation
It also posted adjusted EBITDA of $55 million, which was above the high end of its guidance by about $40 million.
The trends in the number of active riders and the revenues per active rider are certainly encouraging.
Source: Investor Presentation
As shown above, Lyft has exceeded its pre-pandemic level of revenue per active rider while it has also retrieved most of its lost riders.
On the other hand, while Lyft is doing well in growing its top line, it is still far from making a profit anytime soon. It has posted material losses in every single quarter in recent years. The fact that the company has struggled to achieve positive EBITDA is certainly concerning.
Even worse, the patience of the investing community seems to have been exhausted. In other words, the market is not excited about the strong revenue growth of Lyft anymore; it now demands to see the business turning a profit.
In its latest conference call, the management of Lyft stated that it will greatly increase spending in order to attract more drivers in its platform. That statement, which signaled that profit margins will become even more negative in the near future, was the main reason behind the 30% plunge of the stock on that day. To cut a long story short, the investing community has begun to realize that Lyft is struggling to translate its high revenue growth into profitable growth.
Even worse, margins are currently under pressure due to the multi-year high gas prices, which have resulted from the sanctions of western countries on Russia for its invasion in Ukraine. It has thus become more expensive to attract new drivers in the platform.
On the bright side, Lyft has significantly improved its EBITDA in recent quarters.
Source: Investor Presentation
If it continues to improve its EBITDA at a fast pace for years, it is likely to eventually become profitable at some point.
Moreover, the consumer transportation market is a $1.2 trillion market, with over $1.0 trillion spent on car ownership. Given the strong momentum of Lyft in terms of its number of riders and drivers, it is evident that the company has high revenue growth potential. As long as revenue keeps growing at a high rate, the business will have increased odds of becoming profitable in a few years.
On the other hand, no one can predict when the company will manage to make a meaningful net profit. While Lyft management provided guidance for positive EBITDA just a few quarters before achieving that goal, it has not provided any guidance with respect to positive free cash flows or earnings.
Lyft spent 22% of its revenues on R&D expenses in the first quarter. It thus improved this metric from the 39% spent in 2021 but more quarters are needed to generate a safe conclusion. In any case, the company still spends a great portion of its revenues on R&D expenses, which are required for the expansion of the company. Moreover, the company spent 39% of its revenues on sales, marketing and administrative expenses.
It is thus evident that Lyft needs to spend a large amount to grow its business. As long as R&D and marketing expenses remain elevated, cash flow will suffer, and hence it will likely prevent Lyft from paying a dividend for the foreseeable future. We expect the company to keep posting negative free cash flows for at least another few years.
Even if Lyft achieves positive free cash flows in a few years, it will almost certainly prefer to reinvest its excess cash, given that its business will remain in high-growth mode for several more years. When a company expands its revenue base at such a fast rate, a dividend is typically the last thing that management has in mind.
Will Lyft Ever Pay A Dividend?
Until Lyft becomes profitable, investors should not expect a dividend from the company. Even when the company becomes profitable, investors should not expect a dividend right away. As Lyft is still a high-growth company, its stock will be trading at excessive price-to-earnings ratios when it does become profitable.
Consequently, even if the company considers distributing a portion of its earnings in dividends, those dividends will be negligible for the shareholders. For instance, if Lyft trades at a price-to-earnings ratio of 50 and decides to distribute 25% of its earnings in the form of dividends, it will offer a ~0.5% dividend yield to its shareholders. Such a yield will be negligible for the shareholders of a high-growth stock.
Moreover, a dividend is a long-term commitment. Once a company initiates a dividend, its shareholders expect to receive a regular dividend each quarter. In fact, they expect to receive a growing dividend year after year. Therefore, a company needs to achieve reliable earnings for many years before it initiates a dividend. As Lyft is very far from posting consistent profits for years, investors should realize that the company is very far from initiating a dividend.
As dividends are paramount for income-oriented investors, most investors in this category will likely avoid the stock. However, the rest of investors should not dismiss the stock solely for the absence of a dividend. When a business has tremendous growth potential, management should focus exclusively on investing in the business in the best possible way and not be distracted with a meaningless dividend.
There are many examples of companies that have rewarded their shareholders with exceptional returns even though they have never paid a dividend. Just to name a few, Amazon (AMZN), Alphabet (GOOG) and Tesla (TSLA) have offered life-changing returns without paying a dividend to their shareholders.
Of course, Lyft still has a long way to go to produce impressive returns, as the company is not likely to achieve positive free cash flows anytime soon. This separates Lyft from other free cash flow positive tech giants such as Amazon and Alphabet, neither of which pay a dividend.
Lyft is growing its revenue at a tremendous pace and has exciting growth potential ahead. The pandemic temporarily disrupted the growth trajectory of Lyft in 2020 but the company has returned to growth mode.
However, the company has a long way to go to achieve a meaningful profit, let alone consistent profits for years. Even if it achieves earnings for some years, it will probably need to continue investing hefty amounts in its business in order to keep growing.
Moreover, its stock will probably be trading at a high price-to-earnings ratio and thus it may not be able to offer a meaningful dividend yield to its shareholders. As a result, Lyft is not likely to offer a dividend for the next several years at least.
On the bright side, the stock of Lyft is 74% below the IPO price due to the pandemic and the extremely high growth expectations that prevailed during the period of the IPO. As the company has ample room for future growth, the stock has good odds of rewarding those who have the courage to adopt a contrarian stance under the current adverse market conditions.
See the articles below for analysis on whether other stocks that currently don’t pay dividends will one day pay a dividend: