Updated on May 12th, 2022 by Aristofanis Papadatos
In December, Square (SQ) changed its name to Block to better reflect its efforts, not only on crypto, but also on a variety of business lines. Block offered life-changing returns since its IPO, in 2015, until it peaked last year. During this period, the stock rallied more than 23-fold, from $12.50 to $289.
Since it peaked, Block has plunged 75% due to its rich peak valuation and the sell-off of the entire NASDAQ this year, but it is still almost 6 times higher than its IPO price.
The great return of the stock is a result of the exceptional growth of the company and its still exciting growth potential.
Income investors have probably missed the breathtaking rally of Square, as the company does not pay a dividend. The absence of a dividend is fairly common among technology stocks, particularly in the early phases of their growth story.
While Square has yet to pay a dividend, the 44 Dividend Kings have all increased their dividends for 50+ consecutive years. You download the Dividend Kings spreadsheet by clicking on the link below:
Income investors who are attracted by the impressive return potential of Square probably wonder whether the company will pay a dividend anytime soon.
Continue reading this article to learn more about Square and the company’s future dividend prospects.
Block is a high-quality financial technology company. It offers payment and point-of-sale solutions in the U.S. and in foreign markets. It also provides hardware products such as the Magstripe reader, which enables transactions of magnetic stripe cards.
Block is an exceptional company. Most companies try to grow by expanding their core business but Block follows a different approach. It continuously tries to add new businesses to its portfolio by expanding the capabilities of its systems in order to grow its total addressable market as much as possible.
Source: Investor Presentation
Block has greatly expanded the capabilities of its two major ecosystems, Seller and Cash App.
Seller was much simpler in the beginning but it now enables merchants to keep track of their payments, invoices, payrolls and inventory. In addition, Block offers a business debit card, which provides sellers with immediate access to their funds without the need to set up a bank account. The adoption of this debit card has increased every quarter since the launch. This business card has rendered sellers much more dependent on Block.
Moreover, Block is continuously trying to expand the scope of its Cash App ecosystem. In 2019, the company launched a stock brokerage product, which has enjoyed extremely fast adoption. Block has also introduced FDIC insurance on all accounts with Cash App and thus it has built trust on its system. It has also made Bitcoin more accessible through Cash App.
Notably, anyone with Cash App can automatically invest a portion of his/her paycheck into Bitcoin without any transaction fees. As a result, more than 10 million customers have purchased Bitcoin with the use of Cash App since the launch of the offering.
It is also worth noting that Block has proved resilient throughout the coronavirus crisis, which has rendered the online presence of merchants and their immediate access to cash more important than ever.
In the most recent quarter, Cash App posted gross profit growth of 26% while Cash App Card posted impressive gross profit growth above 50% over the prior year’s quarter. As a result, Block grew its gross profit 34%.
Block has an enviable performance record, as it has grown its gross profit at a 40% average annual rate since 2015.
Source: Investor Presentation
Block has ample room to continue growing at a double-digit rate for several more years. The company has penetrated less than 3% of its total addressable market of sellers, which is a market worth more than $100 billion.
Source: Investor Presentation
Block has penetrated less than 2% of the addressable market of individuals, which is worth more than $60 billion. It is evident that the company has room for future growth for many years, particularly if it continues to expand the capabilities of its ecosystems.
The primary growth driver for the company will be Cash App. This ecosystem represented only 25% of the business of Block in 2019 but it is currently representing 63% of the business thanks to its impressive momentum.
Analysts seem to agree virtually unanimously that Block has exciting growth potential. They expect the company to nearly quadruple its earnings per share over the next three years, from $0.92 this year to $3.45 in 2025.
Block has greatly enhanced the capabilities of its two ecosystems in just a few years. Thanks to its sustained product improvement, it has significantly increased the engagement of its customers and their dependence on its products.
Source: Investor Presentation
It has also built a strong brand thanks to word-of-mouth. As a result, Block enjoys a material competitive advantage.
On the other hand, investors should never forget that technology companies rarely enjoy a strong competitive advantage, as it is usually inexpensive to imitate their business model. In addition, there is always cut-throat competition in the tech sector and hence many companies run the risk of incurring business deterioration if their competitors achieve major technological breakthroughs. This is certainly the case for Block.
On the bright side, as many customers of Block have engaged in more than one of the applications of its products, they are not likely to migrate to a competitor. Overall, Block enjoys a relatively narrow business moat but its moat is somewhat wider than that of most tech stocks.
Will Block Ever Pay A Dividend?
In order to pay a dividend, companies need to generate positive free cash flows. In other words, their business should generate cash flows that exceed the capital expenses by a wide margin. Some popular stocks cannot pay dividends to their shareholders due to their negative free cash flows. For instance, Uber (UBER), Lyft (LYFT) and Nikola (NKLA) have not managed to generate positive free cash flows yet.
Block spends a significant portion of its revenues on sales and marketing expenses in order to attract new customers and increase the engagement of existing customers. It also spends appreciable amounts in product development to enhance the value of its products.
Block recently stated that it intends to grow its operating expenses by 35% this year, to approximately $1.2 billion. This amount is about one-fourth of the gross profit of the company in the last 12 months and hence it represents a significant amount.
Due to the elevated amounts that Block has spent on R&D and on sales and marketing expenses every year, its free cash flows have been negative, except for 2021, when the company posted positive free cash flows for the first time since its IPO. However, the company still has a long way to go to generate reliable and excessive free cash flows year after year.
As mentioned above, analysts expect Block to nearly quadruple its earnings per share over the next three years, from $0.92 in 2022 to $3.45 in 2025. However, investors should not expect a dividend from Block as long as the company remains in high growth mode. The company is growing its business at such a high rate that it makes much more economic sense to invest in the business instead of initiating a dividend.
As Block has several years of double-digit earnings growth ahead, it is not likely to initiate a dividend anytime soon. Instead, its management is likely to remain focused on enhancing the scope of its products, improving them and promoting them in order to continue attracting new customers and keep the existing customers as engaged as possible. Therefore, the shareholders of Block should not expect a dividend anytime soon.
High-growth companies do not offer a dividend for another reason as well. Their stocks usually enjoy such a rich valuation that a dividend is meaningless for the shareholders. To provide a perspective, Block is currently trading at 77 times its expected earnings in 2022.
Even if the company distributes 50% of its future earnings in the form of dividends, it will offer just a 0.6% dividend yield. Such a yield would be negligible for shareholders and hence there is no incentive for the company to initiate a dividend.
Block has exhibited an exceptional growth record since its IPO in 2015. Even better, it is still in the early stages of its growth trajectory, with promising growth prospects ahead thanks to the continuous expansion of the applications of its products.
However, the company will continue investing a great portion of its revenues in its business in order to keep growing its customer base and increase the engagement of its existing customers. As a result, Block is not likely to initiate a dividend for the next several years.
See the articles below for analysis on whether other stocks that currently don’t pay dividends will one day pay a dividend: