big surprise at meta platform‘ (meta 20.32%) Last week’s fourth-quarter earnings report marked the social media giant’s first payout. Meta plans to pay shareholders of record $0.50 per share on February 22nd. The dividend yield on an annual basis is approximately 0.5%.
This dividend yield is likely to rise over time as Meta increases its dividend, although share buybacks remain a large part of the stock. In conjunction with the dividend announcement, Meta revealed that an additional $50 billion has been allocated for share buybacks. Meta spent about $20 billion on stock buybacks in 2023. At current levels, dividends will consume just over $5 billion next year.
Tough sell for dividend investors
Meta is a tough sell for dividend investors. There is plenty of room to increase the dividend over time. Meta reported 2023 net income of $39 billion and free cash flow of $44 billion. However, stock buybacks seem to be a priority.If the meta followed the same path applehas been paying dividends for 10 years, but it still yields around 0.5%, so the dividend will never be that important.
Another issue is meta evaluation. The stock price is not too high, but it’s not cheap either. The post-earnings increase has given it a market capitalization of about $1.2 trillion, and it trades at about 27 times free cash flow.
Although Meta reported strong growth in the fourth quarter, with sales up 25% year over year and net income more than tripling, there are also a number of long-term uncertainties. First, its core social media business faces the prospect of tighter regulation. “If we wanted to, we could regulate you out of business,” Sen. Thom Tillis said during a recent Senate hearing with top social media executives focused on child safety. .
The return on Meta’s massive investment in the metaverse and artificial intelligence (AI) is also unclear and uncertain. Meta’s specialized Metaverse division, Reality Labs, reported operating losses of his $16 billion in 2023, and the company is pouring additional cash into AI hardware. Improving different platforms with AI capabilities makes sense, but it is an expensive proposition.
A better deal for dividend investors
For those who are not convinced by the long-term potential of the meta, international business machine (IBM -0.59%) Looks like a much better deal. IBM’s artificial intelligence strategy is very clear. We combine software and consulting services to help enterprise customers adopt AI technology.
IBM’s watsonx AI platform is a key element of this strategy, but it’s the consulting that brings customers in. In its fourth quarter report, the company revealed that AI commitments from customers doubled in the fourth quarter from the third quarter, with two-thirds of the business being driven by its consulting division.
IBM is expected to generate $11.2 billion in free cash flow in 2023, with strong demand for AI products and services contributing to growth in 2024. The company is targeting free cash flow of $12 billion in 2024. It’s about 14, or about half of Meta.
IBM is growing slower than Meta and is expected to have mid-single-digit revenue growth in 2024. However, IBM’s business has less uncertainty. Demand for IBM’s enterprise software and services waxes and wanes with economic conditions, but the company faces no existential threats like Meta’s social media business and monthly plans like Meta’s Metaverse business. It’s not like I’m dependent on it.
Then there’s the dividend. IBM has paid an uninterrupted quarterly dividend since 1916 and has raised its dividend every year for nearly 30 years. Based on the latest quarterly payment of $1.66 per share, IBM stock currently has a dividend yield of about 3.6%, which is more than double the dividend yield. S&P500The yield is only 1.4%.
This dividend is well covered by free cash flow. IBM plans to pay out about $6.1 billion in dividends over the next year, representing just over 50% of its free cash flow. That would leave plenty of cash available for other uses, including debt reduction, acquisitions and the possibility of restarting share buybacks. IBM suspended all stock buybacks after completing a major deal with software company Red Hat in 2019.
IBM’s stock price has risen over the past year, rising nearly 40% as investors began to buy into the company’s growth story. IBM isn’t a meta-growth stock, but the combination of less uncertainty, a cheaper valuation, and a much more generous dividend makes IBM stock a buy.
Randi Zuckerberg is a former head of market development and spokesperson at Facebook, sister of Meta Platforms CEO Mark Zuckerberg, and a member of the Motley Fool’s board of directors. Timothy Green holds a position with International Business Machines. The Motley Fool has positions in and recommends Apple and Meta Platforms. The Motley Fool recommends International Business Machines. The Motley Fool has a disclosure policy.