E What Should Income Investors Think About Tesla?

Tesla (ticker: TSLA) has been one of the best-performing stocks over the last decade: Investors who bought early on were able to capture massive share price gains over the last couple of years. The stocks of many other automobile companies (e.g. Ford (ticker: F)) have not performed well throughout the last couple of years, but on the other hand most other automobile companies offer sizeable dividend yields.

Tesla has never paid dividends, and we believe that it is unlikely that Tesla will offer any dividend payments in the foreseeable future. The company will have to utilize its cash flows for R&D, investments into battery production, new plants, the expansion of the Supercharger network, and many other things. There will, in all likelihood, not be any free cash flows that could be used for dividend payments.

Tesla’s Growth Outlook And The Need To Invest In Its Operations          

With the roll-out of its first mass-market car (the Model 3) Tesla has become a much larger automobile company than it was during the last couple of years. The Model 3 has become the best-selling passenger car in the US during the third quarter, although there are better-selling models in other categories (e.g. the F-150 in the truck segment).

The success of its Model 3 has catapulted Tesla’s revenues upwards, and the company has been able to report profits and, surprisingly, positive cash flows during the third quarter. During past quarters Tesla has not been able to operate profitably on a consistent basis, primarily due to the fact that the sales of its premium models (S & X) were not high enough to cover all of Tesla’s R&D and production expansion investments.

During the third quarter Tesla has generated operating cash flows of $1.4 billion and free cash flows of $880 million. This does not mean that Tesla will start returning cash to its owners, though, as there are many items with a higher priority for the company. This includes the ongoing expansion of its production capabilities for the Model 3, as well as spending on R&D and pre-production for several new models. Tesla plans to enter the commercial truck manufacturing industry, for example, on top of that Tesla also plans to introduce the Model Y (a cross-over) that should bolster Tesla’s position in the mass-market further. Tesla plans to produce one million vehicles a year by 2020, so it is foreseeable that a lot of investments will be required.

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