E Twitter: Justifiable To Pay A Dividend, But Don’t Expect One

It was not too long ago that it was thought to be inconceivable for a tech stock to pay a dividend. The prevailing wisdom held that tech companies need to retain every dollar of cash flow, to plow back into the business in order to fund R&D and generate future growth.

But times have changed, and many U.S. tech companies have started paying dividends. Many tech stocks have become so profitable, with billions of excess cash flow piling up on the balance sheet. For example, Twitter (TWTR) is now a highly profitable company, with little debt to worry about. It is highly cash flow-positive, all of which means it could pay a dividend. But here’s why investors should still not expect a Twitter dividend any time soon.

Twitter’s Impressive Growth

The first (and most common) reason why many companies do not pay dividends to shareholders, is that they simply cannot afford to. Companies that are still losing money, or have inconsistent profits from year to year, typically do not pay dividends. After all, a company must generate steady profits and free cash flow in order to have the means to pay dividends.

But while Twitter posted losses in 2016 and 2017, the company became profitable last year. It has continued to be profitable this year and has grown its revenue and profits at an impressive rate. Twitter should continue to be profitable going forward, as its growth provides it with scale.

Twitter is a social media platform, that has grown to nearly 150 million monetizable daily active users. It dominates the social media industry, behind industry leader Facebook (FB). Even though it is not the industry leader, Twitter is a very successful company from a financial perspective.

Revenue increased 9% last quarter and was up 15% over the first nine months of the year. In the same period, Twitter’s diluted earnings-per-share increased 40%. The company generated free cash flow of $637 million through the first nine months of 2019.

Twitter is also in excellent financial shape. The company holds approximately $5.8 billion in cash and marketable securities on the balance sheet. This compares with just over $3 billion in total debt, meaning the company has a significant net cash position. Excessive debt is one of the reasons why many companies cannot pay dividends to shareholders, but this is clearly not the case for Twitter.

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