Updated on November 18th, 2022 by Bob Ciura
The appeal of growth stocks is that they have the potential for huge returns. Consider the massive rally by Tesla, Inc. (TSLA); in just the past three years, the stock has returned over 600% to shareholders. That’s a lifetime of returns and more for many investors, and Tesla has done this in a very short period of time. In addition, that’s including the stock falling by more than half since late-2021.
The downside of growth stocks of course, is that volatility can work both ways. Tesla has recently become consistently profitable, but that was certainly not always the case. And the company had a mounting debt load, in addition to share issuances that diluted shareholders to support growth. Growth stocks can generate strong returns, but also carry the burden of high expectations due to their sky-high valuations, and Tesla is certainly no different.
Plus, Tesla does not pay a dividend to shareholders, which is also an important factor for income investors to consider. As a result, we believe income investors looking for lower volatility should consider high-quality dividend growth stocks, such as the Dividend Aristocrats.
The Dividend Aristocrats is a group of 65 stocks in the S&P 500 Index with 25+ consecutive years of dividend growth. You can download an Excel spreadsheet of all 65 (with metrics that matter such as dividend yield and P/E ratios) by clicking the link below:
Over time, any company – even Tesla – could make the decision to start paying dividends to shareholders, if it becomes sufficiently profitable. In the past decade, other technology companies, such as Apple, Inc. (AAPL) and Cisco Systems (CSCO), have initiated quarterly dividends. These were once rapidly growing stocks that matured, and Tesla could follow the same way one day.
However, the ability of a company to pay a dividend depends on its business model, growth prospects, and financial position. Even with Tesla’s huge run-up in share price, whether a company can pay a dividend depends on the underlying fundamentals. While many growth stocks have made the transition to dividend stocks in recent years, it is doubtful that Tesla will join the ranks of dividend-paying stocks any time soon.
Tesla was founded in 2003 by Elon Musk. The company started out as a fledgling electric car maker but has grown at an extremely high rate in the past several years. Tesla has a current market capitalization above $550 billion, making it a mega-cap stock.
Amazingly, Tesla’s current market capitalization is more thanfive timesthe combined market caps of auto industry peers Ford Motor (F) and General Motors (GM).
Tesla has a growing lineup of different models and price points and is looking into expanding that lineup further to become a full-line automaker. Since going public in 2010 at a split-adjusted price of just $1.13 per share, Tesla has produced almost unbelievable returns for shareholders on hopes of massive future growth.
Since then, it has grown into the leader in electric vehicles, and it also has business operations in renewable energy. Tesla is slated to produce about $84 billion in revenue in 2022.
On October 19th, the company reported better-than-expected adjusted earnings-per-share of $1.05 in the third quarter. This beat expectations of $1.01 per share. Tesla has exceeded the analysts’ earnings-per-share estimates for seven consecutive quarters, thus confirming its strong business momentum.
Quarterly revenue of $21.45 billion came in slightly short of expectations, which called for $22 billion. However, the miss was caused in part by lockdowns in China, which forced the production plant of the company in Shanghai to operate far below capacity for some of the quarter. The company has noted freight and shipping bottlenecks at times as well, but importantly, these factors are not driven by lack of consumer demand for the product. Overall, Tesla enjoys impressive business momentum.
Automotive gross margin of 27.9% which was flat to the previous quarter, but down from 30.5% in the year-ago quarter. Margin contraction was due mostly to cost inflation and reduced economies of scale amid lower production rates. However, the issues causing margin compression should abate in the coming quarters, and we believe gross margins should rise back above 30% in the relatively near future.
Tesla’s primary growth catalyst is to expand sales of its core product line, as well as generate growth from new vehicles. The company’s S/X platform that gave it the first bout of strong growth has faded in popularity, and Tesla is instead focused on ramping its 3/Y platform.
Indeed, the 3/Y platform accounted for about 95% of all deliveries in the most recent quarter.
In addition to that, Tesla is continuing to develop new models, with a pickup truck rumored, a semi truck, and even a cheaper, more attainable model than the 3.
Tesla is investing heavily in strategic growth, through acquisitions as well as internal investment in new initiatives. First, Tesla acquired SolarCity in 2016 for $2.6 billion. The company is also ramping up vehicle production. Tesla now operates “Gigafactories” in California, Berlin, Austin, and Shanghai, with more to come to support its burgeoning demand.
The company is also doing its best to reduce bottlenecks in its processes and hence delivery times. Thanks to these efforts, it recently announced that its delivery times of its rear-wheel drive model Y in China has been shortened to 1-4 weeks. This is a major improvement compared to a few months earlier, when customers had to wait for several weeks after they placed their orders.
Tesla’s growth in revenue per share has been nothing short of outstanding. It produced more than two hundred times more revenue per share last year than 2010, the year it came public. That level of growth is difficult to find anywhere, and it is why Tesla’s shares have performed so well. Whether Tesla can continue to maintain its high rate of growth is another question. Management recently stated that it expects to grow vehicle deliveries by 50% per year on average in the upcoming years.
Such a growth rate is undoubtedly outstanding and bodes well for the future potential of the company. Some investors may view the guidance of Tesla as too aggressive but they should note that sales of electric vehicles are growing at a breathtaking pace. Electric vehicles are the clear and unwavering path forward for automobiles, and Tesla is the definitive leader in the space.
Will Tesla Pay A Dividend?
Tesla has experienced rapid growth of shipment volumes and revenue in the past several years. But ultimately, a company’s ability to pay dividends to shareholders requires success on the bottom line as well. While Tesla has been the epitome of a growth stock through its top-line growth and huge share price gains, its profitability is still diminutive in relation to its market cap. To be sure, the stock is currently trading at 44 times its expected earnings this year.
Without reaching steady profitability, a company simply cannot afford to pay a dividend to shareholders. In fact, consistently losing money means a company will have trouble keeping its doors open, if losses persist over time. However, while this used to be an issue for Tesla, those issues seem to have been fixed by ever-rising delivery volumes.
Tesla lost money since it became publicly traded back in 2010, up until 2020. It goes without saying that a money-losing company has to raise capital to continue to fund operations. To that end, Tesla has sold shares and issued debt to cover losses and fund expansion in recent years, both of which make paying a dividend even more difficult.
However, since 2020, Tesla has rapidly expanded its profitability, and produced almost $6 billion in net income in 2021. The company also produced nearly that much in free cash flow, making it much easier to service its debt obligations, as well as avoid future dilutive share issuances.
Moreover, Tesla has generated net income of ~$11 billion in the last 12 months and is expected to earn more than $13 billion this year. Furthermore, its interest expense currently consumes less than 2% of its operating income while its long-term debt of $1.4 billion is a very small fraction of earnings. In other words, Tesla has improved its profitability so much that its debt has become essentially negligible. We see the sizable improvement in profitability and free cash flow, as well as the improved balance sheet, as supportive of the company’s ability to eventually pay a dividend.
However, Tesla is still very much in hyper-growth mode, and we expect any dividend that may be paid to be many years away. In other words, it is much more profitable for Tesla to reinvest its earnings in its business than to distribute them to its shareholders.
Even if Tesla decided to initiate a dividend, it would be meaningless for its shareholders due to the sky-high valuation of the stock. For instance, if Tesla decides to distribute 30% of its earnings to its shareholders in the form of dividends, the stock will offer just a 0.7% dividend yield. Such a yield will be immaterial for the shareholders but the dividend will deprive the company from precious funds, which can be utilized in high-return growth projects.
Tesla’s Stock Dividend
Tesla’s famous CEO, Elon Musk, saidrecentlythat he wants Tesla to “increase in the number of authorized shares of common stock … in order to enable a stock split of the Company’s common stock in the form of a stock dividend.”
Essentially, a stock dividend is where a company splits its stock, and the impact on shareholders is that the value of the company doesn’t change, but the share price is lower because there are more shares outstanding.
Indeed, Tesla implemented a 3-for-1 split on its stock, which came in force on August 25th, 2022. As a result, its outstanding share count rose from 1.155 billion to 3.465 billion post-stock dividend and the stock price adjusted from about $900 before the split to about $300.
A stock dividend is not necessarily a material event for shareholders, because their relative stake in the company remains the same; they just have more shares at a lower price. However, investors tend to view stock dividends and splits as bullish events and thus stock dividends can trigger rallies in the share price. Since the split, shares of Tesla have plunged to $183, a decline of more than a third, so the potential split rally did not come to fruition.
Tesla had been among the market’s hottest stocks since the start of the pandemic, producing a massive rally that has taken it above $550 billion in market cap. Shareholders who had the foresight to buy Tesla near the 2019 lows have been rewarded with enormous returns through a soaring share price. Much of the pandemic rally has been unwound, however, which has improved the prospects of the stock going forward.
However, investors looking for dividends and safety over the long run should probably continue to take a pass on Tesla stock. The company seems committed to use all the cash flow at its disposal to improve its operations’ profitability, and invest in growth initiatives. While there is always a possibility that Tesla’s massive share price rally could continue, it is also possible the stock could fall. Investors should remember that volatility can work both ways, and indeed, Tesla shareholders were reminded of this in early-2022, and again recently.
More defensive investors such as retirees, who are primarily concerned with protection of principal and dividend income, should instead focus on high-quality dividend growth stocks, such as the Dividend Aristocrats. It is unlikely that Tesla will ever pay a dividend, or at least, not for many years.
See the articles below for analysis on whether other stocks that currently don’t pay dividends will one day pay a dividend:
- Will Amazon Ever Pay A Dividend?
- Will Shopify Ever Pay A Dividend?
- Will PayPal Ever Pay A Dividend?
- Will Advanced Micro Devices Ever Pay A Dividend?
- Will Chipotle Ever Pay A Dividend?
If you are interested in finding more high-quality dividend growth stocks suitable for long-term investment, the following Sure Dividend databases will be useful:
- The 20 Highest Yielding Dividend Aristocrats
- The Dividend Kings List is even more exclusive than the Dividend Aristocrats. It is comprised of 48 stocks with 50+ years of consecutive dividend increases.
- The 20 Highest Yielding Dividend Kings
- The Dividend Achievers List: a group of stocks with 10+ years of consecutive dividend increases.
- The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years.
Note: Not all Dividend Champions are Dividend Aristocrats because Dividend Aristocrats have additional requirements like being in The S&P 500.
- The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.
- The Monthly Dividend Stocks List: contains stocks that pay dividends each month, for 12 payments per year.
- The 20 Highest Yielding Monthly Dividend Stocks
- The High Dividend Stocks List: high dividend stocks are suited for investors that need income now (as opposed to growth later) by listing stocks with 5%+ dividend yields.
The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly:
- The Complete List of Russell 2000 Stocks
- The Complete List of NASDAQ-100 Stocks
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