Updated on August 31st, 2022 by Quinn Mohammed
Twitter (TWTR) stock has had a great run. In the past five years, shares of Twitter have generated 18.8% annualized returns, compared with 12.5% 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.
Note: For those curious, the two are IBM (IBM) and ADP (ADP).
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 of people to discuss 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.
Twitter is not resting on its laurels, as 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 user’s timelines and notifications.
In Twitter’s second quarter, revenue of $1.18 billion was down by 1% year-over-year. The operating loss of $344 million compared unfavorably to operating income of $30 million in the prior year quarter. This represented an operating margin of -29%. Meanwhile, average monetizable daily active usage increased 16.6% year-over-year to 237.8 million.
On April 25th, Twitter agreed to be acquired by Elon Musk for $44 billion, or $54.20 per share in cash. The offer price was a 38% premium to Twitter’s closing price on April 1st, when Elon Musk first disclosed his initial 9% share of the company.
Since then, on July 8th, representatives of Elon Musk delivered a notice claiming they were terminating the merger agreement. However, Twitter claimed that this termination was invalid under the previous agreement with Elon Musk. As a result, Twitter has entered into litigation against Elon Musk and certain affiliates to cause them to follow through with the agreement. The expedited trial is scheduled for October 2022.
Moreover, on August 29th, Elon Musk submitted an official deal termination letter. This letter referenced the whistleblower complaint filed by Twitter’s former head of security, Peiter Zatko. The accusation claimed that Twitter misled the public about its security and practices, and we expect Musk will make use of these claims to try to exit the agreement.
The current 27% spread between Twitter’s stock price and Elon Musk’s bid indicates there is uncertainty over whether the deal will be finalized.
Elon Musk previously planned to privatize the company following the purchase and also indicated he may bring the company back to public markets after three years.
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 can generate substantial free cash flow.
However, in the second quarter of 2022, Twitter generated adjusted free cash flow of ($124) million, compared to positive $106 million in the same prior year period.
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 cash position. Cash and cash equivalents, plus short-term investments, totaled $6.12 billion at the end of the 2022 second quarter. This represents a little more than 20% of the current market cap of the stock.
Meanwhile, total current liabilities stand at just $1.0 billion, with total liabilities of $7.6 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 second quarter of 2022, Twitter’s research and development expenses grew 52%, and its sales and marketing expenses grew 2% versus the same period last year.
As a result, Twitter continues to conserve 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.
However, 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.
Furthermore, if Elon Musk’s purchase of Twitter is finalized, the company may be privatized, and current shareholders will therefore no longer own TWTR stock.
Final Thoughts
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 can generate 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.
Additionally, with the potential looming privatization of Twitter by Elon Musk, shareholders should not expect a dividend. Though a dividend may be initiated if the company returns to public markets some years after.
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:
