Updated on November 18th, 2021 by Bob Ciura
Twitter (TWTR) stock has had a great run. In the past five years, shares of Twitter have returned 22.2% annualized returns, compared with 16.4% annual returns for the S&P 500 Index in the same period.
However, Twitter has never paid a dividend.
This is not unusual for big tech companies, many of which do not pay dividends to shareholders. This is why the tech sector is relatively under-represented among the various lists of dividend growth stocks.
For example, the Dividend Aristocrats list – a group of 65 stocks in the S&P 500 that have raised their dividends for 25+ years in a row – counts only two information technology companies among its constituents.
You can download an Excel spreadsheet of all 65 Dividend Aristocrats (with important financial metrics such as price-to-earnings ratios and dividend yields) by clicking the link below:
With that said, many large technology stocks do now pay dividends, such as Apple (AAPL), Microsoft (MSFT), and many more.
Dividends are becoming more common in the tech sector, as large businesses become more mature and reach profitability.
Therefore, it is only natural that some Twitter shareholders might wonder whether the company will ever initiate a dividend.
Business Overview & Recent Events
Twitter is a social networking giant, which provides a platform to millions people to discuss about everything that happens in the world, including breaking news, politics, sports and everyday interests.
Despite its popularity, the company is still in its early phases of expansion, which are typically characterized by high growth without accompanying dividends.
Source: Investor Presentation
Twitter does not rest on its laurels–it is continuously trying to make it easier for people to find content relevant to the topics of their interest and follow new conversations.
To this end, the company is trying to improve its machine-learning models in order to provide more relevant content in everyone’s timelines and notifications.
In the third quarter, revenue of $1.28 billion rose 37% year-over-year. Operating loss of $743 million was due entirely to a $766 million one-time charge related to litigation. Average monetizable daily active users increased 13% year-over-year to 211 million.
For the fourth quarter of 2021, Twitter expects total revenue between $1.5 billion and $1.6 billion. GAAP operating income is expected to be between $130 million and $180 million.
Management maintains an optimistic outlook for future growth, due in large part to the advertising potential of its platform. Twitter forecasts at least $7.5 billion of annual revenue by 2023, as it projects a total addressable market of ~$150 billion for ads on its website and apps.
Cash Flow & Balance Sheet Analysis
Twitter has posted losses in multiple years, which is common for tech stocks in their early stages. However, Twitter has grown to the point where it now generates substantial free cash flow.
For example, in the first three quarters of 2021, Twitter generated free cash flow of $290 million.
As dividends are funded directly from free cash flows, this is an important factor for income investors to consider.
Moreover, Twitter has a rock-solid balance sheet with a strong net cash position. Cash and cash equivalents, plus short-term investments, totaled $7.41 billion at the end of the 2021 third quarter. This represents nearly 20% of the current market cap of the stock.
Meanwhile, total current liabilities stand at just $2.11 billion, with total liabilities of $7.42 billion.
Twitter’s growing free cash flow and strong financial position could lay the groundwork for a dividend payout at some point down the road.
Will Twitter Ever Pay A Dividend?
As mentioned above, Twitter has become profitable, although it is not yet consistently profitable in every quarter. Rising free cash flow is an important step toward initiating a dividend one day.
However, it is critical to note that the earnings of the company are still volatile. The initiation of a dividend is a long-term commitment for any company.
Once shareholders begin to receive a dividend, they expect to receive it quarter after quarter. In fact, they expect to receive a growing dividend every year.
Due to its volatile results, Twitter cannot make such a long-term commitment right now.
Moreover, when a company is still in its-high growth phase, it makes much more financial sense to reinvest the profits in the business, than to return cash to the shareholders. That’s why most high-growth stocks do not distribute a dividend.
Twitter still has ample room to grow, by improving its platform and by expanding to new markets.
Indeed, the company is still investing heavily for growth. Over the first three quarters of 2021, Twitter’s research and development expenses grew 40%, and its sales and marketing expenses grew 30% versus the same period last year.
As a result, Twitter continues to preserve as much cash as possible in order to fund its growth strategy.
Multiple technology companies have initiated dividends in the past decade, as their businesses matured and opportunities for future growth were reduced.
But as long as Twitter management continues to believe the best use of cash flow is reinvestment in growth, it is unlikely the company will pay a dividend, even if its fundamentals technically justify a dividend payout.
Twitter has been growing its revenues at a fast pace and is doing its best to further improve its platform in order to attract more people and lead its current users to use the platform more often.
As the company has reached profitability and generates strong free cash flows, it has the capacity to initiate a dividend.
However, its earnings are still too volatile for a long-term dividend commitment.
In addition, as Twitter has ample room to grow for many more years, it is much more profitable for the company to reinvest its profits in its business than to return funds to its shareholders. As a result, we do not expect Twitter to pay a dividend for the next several years.
See the articles below for analysis on whether other stocks that currently don’t pay dividends might one day pay a dividend: