eBay (EBAY), with its steady growth, consistent profit and low capital investment business model, is a prime candidate to institute a quarterly dividend program. As the company continues to pile up cash and increase cash flow from operations, management has given little indication that it has a firm plan to use cash for any major acquisitions. An effort has been made in recent years to return value to shareholders through a share buyback, but with the stock trading near a multi year high, management should be asking itself if that money cannot be better spent. In this article I will make the case that eBay will soon announce a dividend program and I will try to estimate what investors can expect in terms of payout.
eBay - Not A Tech Leader
In the early years of the internet revolution, eBay and Amazon (AMZN) were often referred to in the same sentence, as leaders in the nascent internet retail sectors. Currently, as the two companies continue to dominate the retail scene, their business strategies are almost completely different. Amazon has become a highly diversified technology company, using the cash flow from its retail operations to fund a host of parallel business lines. Rather than simply focusing on selling consumer goods online, the company has developed a dominant presence in online music downloads space and a top rate internet movie streaming service. Amazon developed the highly successful Kindle ebook reader which has revolutionized the ebook market and in many ways is a player in the fast growing tablet computer field. The company has a massive presence in the cloud computing sector through its Web Services division and there have also been persistent rumors that the company may be working on releasing a smartphone in the near future. Diversifying the business and becoming a leader in multiple internet sectors has been costly. While Amazon's revenue has been increasing at a massive rate, the company is also currently unprofitable. It seems that rather than focusing on short term profit, Amazon is focusing on the long term vision of being a leader in the internet services arena.
eBay, has taken a remarkably different approach, both in regards to its business strategy and its financial performance. The company has focused its strategy on expanding its online auction business model to a global level rather than diversifying. The company's early acquisition of PayPal gave it a huge presence in the online payments market, but that line was mainly exploited to enhance the shopping experience of ebay.com users. In 2005 it looked like eBay might try to develop a larger technological presence by purchasing Skype, a fast growing voice over IP and messaging service. Despite expanding the company dramatically, eBay chose to sell off Skype for $8.5 billion in 2011 to Microsoft (MSFT), in order to "focus on its core e-commerce and payments businesses." From a financial perspective, eBay has grown at a much slower pace than Amazon, however the company has been consistently profitable and has high margins, with low capital expenditures. While it may not be a technology leader, it is certainly a dominant force in internet retailing and a highly successful company.
eBay's stock has been a great performer since bottoming out at about $10 in March 2009. Since then, shares have increased almost 400%, and currently trade at about $52. But looking at the performance from a longer term perspective, we can see that despite the recent run up, the stock is trading at a similar level that it was in 2004, almost a decade ago. By way of comparison, Amazon.com's stock value has increased ten-fold from the price it was at in mid 2004 and now trades at almost $400 per share, giving Amazon a market cap of $180 billion.
Clearly, the investment community does not value eBay's business by the same metrics it uses to value Amazon, despite eBay being a far more profitable company. There is little buzz surrounding eBay and seemingly little reason for investors to drive the valuation considerably higher than it currently stands. The company has been spending cash in recent years on a share buyback which has had some success in supporting the stock price and increasing earnings per share, but ultimately the outstanding share count has remained roughly the same. According to eBay, the primary purpose of the buyback is simply to "offset the additional shares being issued as compensation."
"On average, buybacks haven't been a great way to boost shareholder value." David Zion, Credit Suisse
Instituting A Dividend
On a fundamental level, considering the financial condition of the company, shareholders should be expecting a far greater payout. eBay is on track to generate more than $4 billion in cash from operations in 2013 and currently sits on a rather large reserve of cash and short term investments amounting to over $10 billion. For a company with a predictable business model, consistent cash generation and low innovation, shareholders should be questioning why the company is not returning cash via a dividend. As many other companies with large cash reserves, such as Apple (AAPL) and Cisco (CSCO) have recently instituted dividend policies, it will be only a matter of time before eBay is forced as well. And, while eBay has made some rather large acquisitions recently, issuing a small dividend will in no way preclude the company from future purchases. A carefully planned dividend, starting off small and growing consistently, has always been a great choice for increasing stock value and investor interest in a company.
It's difficult to say whether a dividend will serve much purpose in invigorating eBay's share price; investors are usually far more attracted to high growth rather than payout. However, considering the company has little prospect of dramatically increasing growth in the near future, a dividend will at least provide some incentive for investors to hold and accumulate share as the company plans an expansion strategy.
A payout ratio which would give eBay's stock a yield of about 2% has been mentioned in the past and would be an ideal way to start the dividend program. The yield would be smaller than that of Cisco and Microsoft, but roughly in line with Apple's. At eBay's current stock price, a 2% yield would equate roughly to a 25 cent quarterly dividend rate, or $1 per year. Based upon eBay's outstanding share count, this dividend would represent an expense of only $1.29 billion per year, or $325 billion per quarter. Considering that the company is expected to have a cash flow from operations of over $4 billion in 2013, and that number is seen increasing steadily well into the future, Ebay would still be able to bank almost $3 billion in cash per year for potential acquisitions, capital expenditures or share buyback initiatives.
The key to any dividend plan is to make shareholders believe that the policy is simply an additional tool that the company is using to benefit shareholder interests. Despite the slow growth of late, eBay is an expanding company and investors will recognize that a dividend will be a reward for holding the stock, as the company implements its expansion plan. A fair and steadily increasing payout will also directly benefit the stock price, especially in our current low interest environment. As other companies have jumped on the dividend bandwagon lately, eBay will soon follow as well, and shareholders will have one more reason to like the stock.