Will NIO Limited Ever Pay A Dividend?

Competitive Advantages

NIO has a gross margin of 13%, which is much lower than the gross margin of the largest player in the industry, Tesla (TSLA), which has a gross margin of 24%. Tesla’s significantly higher margin can be attributed to the economies of scale that result from its much higher sales as well as regulatory credits. Therefore, NIO does not seem to have a meaningful competitive advantage over Tesla.

Moreover, investors should keep in mind that the automotive industry is characterized by intense competition. Auto manufacturers have to spend hefty amounts on capital expenses year after year in order to come up with new models to remain relevant. Otherwise, they risk losing market share to competitors who launch new models.

Overall, the electric vehicle industry is much more appealing than the conventional auto industry thanks to its high growth. But investors should remember that the auto industry, whether electric or conventional, is characterized by cut-throat competition, with narrow profit margins.

Will NIO 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 their capital expenses. Some popular stocks cannot pay dividends to their shareholders due to their negative free cash flows. For instance, Uber (UBER), Lyft (LYFT), and Netflix (NFLX) have not managed to generate positive free cash flows yet in order to pay dividends to shareholders.

NIO spends a significant portion of its revenues on R&D expenses in order to continuously improve the technology of its models and thus become more competitive compared to its peers. In the most recent quarter, NIO spent 13% of its revenue on R&D expenses.

NIO also spends a meaningful portion of its revenues on selling, general, and administrative expenses. In the most recent quarter, NIO spent 16% of its revenue on these expenses. As a result, the company has not managed to make a profit yet while its free cash flows are negative. It is thus evident that there are no funds available for the initiation of a dividend.

Analysts expect ΝΙΟ to switch from a loss per share of -$0.56 this year to a marginal profit per share of $0.05 in 2022 and $0.20 in 2023. However, investors should not expect a dividend from NIO even when it becomes profitable, at least 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 sense to invest in the business instead of initiating a dividend.

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Disclosure: Sure Dividend is published as an information service. It includes opinions as to buying, selling and holding various stocks and other securities.

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