🔬Why Zuck Really Wants a Meta Dividend
Plus: The Kremlin orchestrates a deal for 'Russia's Google', Tesla is the 499th best performing stock in the S&P 500 year-to-date, and much more.
"The only value of stock forecasters is to make fortune-tellers look good"
- Warren Buffett
“Business is the art of extracting money from another man’s pocket without resorting to violence”
- Max Amsterdam
Soft day for the big US markets after Friday’s pop, as the S&P 500 closed down 0.32% and the Nasdaq down 0.20%.
2 of 11 sectors closed in the green, with only Info Tech (+0.6%) and Healthcare (+0.3%) - led by M&A news - the only sectors to close up. Materials (-2.5%) and Utilities (2.0%) got smoked.
January ISM Services PMI came in at 53.4, decently stronger than the Street’s 52.0 bogey.
Nvidia popped again (+4.7%) on a Goldman report that upped the target price, while Tesla tanked 3.6% following news SAP dropped their order and a Musk article about drug use (more below). Popular retail stock Palantir reported ‘meh’ earnings and closed down 1.8%.
Street Stories
Dividend Explainer (pt. II) & Zuckerberg’s Cash Solution
Yesterday I dug into the growth rates associated with companies that pay dividends (‘The Dividend Conundrum’), only to find out that, yes, the old adage that only slow growth companies pay dividends (generally) is true. The most glaring exception to that rule is Meta (the ole Facebook). When Meta announced it was rolling out a dividend last week, that came in the same earnings report where it showed 2023 revenue growth of 17.5%. Not exactly a lame duck or old fogy.
So, in this write-up I’m going to briefly explain why/when companies typically decide to pay a dividend…and why I believe Meta actually has. Let’s go!
To start, the above chart illustrates the sales growth for the 20 largest companies in the S&P 500 that pay dividends - which doesn’t look too bad. But bear in mind that 2023 was something of a banner year. The full picture shows that the median S&P 500 company that pays a dividend grew revenue 6.7% in the last fiscal year, whereas the median non-dividend payer grew revenue 11.1%. (For more on this, check out my note yesterday which has more detail: link)
As for why companies pay a dividend, this is typically done if a company has reached a mature state of growth and has excess cash flow that can be invested in the business or distributed to shareholders. In the era of conglomerates, investing in adjacent (or completely unrelated) business was commonplace but nowadays, corporate governance and engaged/activist shareholders pressure companies to only focus on doing things that they do well. If a company has reached a scale where increased investment in the business yields a lower return, then dividends become much more of a priority.
Moreover, paying a dividend opens up a whole new set of potential investors that are looking for income. Indeed, many mutual funds or investment managers have strict mandates that only allow them to invest in companies that pay a dividend. In fact, it’s fairly common for companies to launch a ‘token dividend’ that doesn’t yield much just to get into the investment sphere of such investors. Nvidia’s 0.03% dividend yield and Apple’s 0.5% are good examples of this.
As for why Meta decided to launch a dividend, some of the above reasons definitely apply. Meta bet the farm on the metaverse - including +$10 billion in investment, +10 thousand employees, and a name change that seems kinda cringe now - but that hasn’t been their only flop (see: Facebook Wall of Shame). Wall Street and investors have been critical of them trying to innovate - and would prefer it if they just acquired proven businesses (like Instagram). Cooling their jets here means they have a lot of cash piling up, which is perhaps best in the hands of their investors.
However, I don’t think that is the main reason. As you can see above, Zuckerberg has around 13% of Meta shares but because they are Class B super voting shares, they carry 10 votes per share (versus 1 vote in the Class A’s). This means that he controls about 61% of voting power at Meta - and essentially that he can do whatever he wants.
Working from the idea that Zuck wants to keep his voting majority (so the Board can’t fire him the next time he pulls a ‘metaverse’) but also pull cash out for his luxurious lifestyle, paying a dividend helps with this tremendously. As you can see, Meta has bought back ~200 million Class A shares over the last few years, which boosts his voting control, but he has also sold a lot of his Class B shares (note that not all the Class B shares were his historically but now they almost all are). The new dividend will end up paying Zuck around $700 million per year so he can maintain his voting dominance and keep his pockets flush.
Tesla’s Battery Runs Out in 2024
Tesla’s shares are off to a bad start in 2024 with the company heavily underperforming the S&P 500. A weak global outlook for EVs, messy Q4 reporting, and some Musk fueled antics (like that whole ‘pressuring Board members to do drugs with him’ thing) have weighed on the company, as has the recent success of competitor BYD. Hell, Tesla shares even went down on the day that Musk’s $56 billion pay package got rescinded (note: this means less dilution for shareholders and should have been a huge positive for the stock).
As it stands, Tesla is down 27.1% this year - making it the second worst performer after SolarEdge in the S&P 500 this year. Tesla’s market cap sits at $598 billion, less than half of its $1.2 trillion dollar peak in November 2021.
Yandex's Kremlin Crunch: A Tech Giant's Ruble Rumble
Yandex NV, often referred to as "Russia's Google," has agreed to a 475-billion-rouble ($5.2 billion) deal to sell its core operations to a consortium of (Kremlin-backed) Russian investors, marking a significant shift towards full Russian ownership amidst geopolitical tensions. The deal - paid for in Chinese Yuan - comes after the founder cut ties with the company following the Ukraine invasion, prior to which the company held a market cap of $27 billion.
The Kremlin has reportedly pushed for a deal for over 18 months, and it’s clear the the investor group doing the deal are key Putin allies. For example, energy company Lukoil - yes, very much not a tech company - is one of the lead investors. Russia is already so censored and full of Putin echo chambers, but this is a big step toward unburdening the Russian people of any unnecessary thinking.
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Joke Of The Day
A stockbroker got his bonus so he went to the finest tailor in town and got measured for a suit. A week later he went in for his first fitting.
He put on the suit and he looked stunning. As he was preening himself in front of the mirror he reached down to put his hands in the pockets and to his surprise he noticed that there were no pockets.
He mentioned this to the tailor who asked him, “Didn’t you tell me you were a stockbroker?” The young man answered, “Yes, I did.”
To this the tailor said, “Who ever heard of a stockbroker with his hands in his own pockets?”
Hot Headlines
CNBC | Novo Nordisk to buy drug manufacturer Catalent for $16.5 billion to expand Ozempic/Wegovy supply. Giant deal which has the potential to mess up a lot of big pharma supply chains as Catalent is the biggest third party drug maker. Pharma’s like Apple, they don’t generally make the stuff they sell.
Tech Crunch | Snapchat lays off 10% of workforce in order to ‘reduce hierarchy,’ says company. So interesting how language progresses: ‘cull the peasants’ became ‘layoffs’ which became ‘operating efficiency’ which is now ‘reducing hierarchy’. Business is so dynamic.
Yahoo | China tightens more trading restrictions for domestic and offshore investors in order to support lagging stock market.
Bloomberg | DOJ launches probe into Archer-Daniels-Midland over its accounting practices. Recall the CFO is ‘on leave’ following his sketchy propping up of the Nutrition business. So many cooler ways to go to jail.
*MarketLab does not condone fraud. Especially uncool fraud.
Bloomberg | Citizens CEO calls NYCB an outlier, says regional-bank pain is in the past. I mean, his shares are down 11% since NYCB so I’d probably say that too. Fingers crossed.
Trivia
This week’s trivia is on Investing 101.
What does 'short selling' in the stock market mean?
A) Selling stocks quickly
B) Selling stocks of companies that are highly volatile
C) Selling borrowed stocks with the aim to buy back later at a lower price
D) Selling stocks below a certain priceThe 'Rule of 72' in finance is used to:
A) Calculate a country's GDP
B) Estimate how long an investment will take to double
C) Determine interest rates
D) Predict stock market crashes'Quantitative Easing' refers to:
A) Lowering interest rates in order to stimulate GDP growth (‘Dovish Policy’)
B) A monetary policy where the central bank buys securities to increase money supply
C) A move by the Treasury to sell shorter duration bonds which typically pay a lower rate of interest
D) Making exams easier
(answers at bottom)
Market Movers
Winners!
Everbridge (EVBG) [+18.4%]: Acquired by Thoma Bravo for $28.60/share, valuing at ~$1.5B, a 20% premium. Deal expected to close in Q2-24.
Catalent (CTLT) [+9.7%]: To be acquired by NVO for $63.50/share in cash, or $11.5B, a ~16% premium. Deal to close by year-end.
ON Semiconductor (ON) [+9.5%]: Q4 results slightly above expectations; Auto met forecasts, Industrial lagged, Other exceeded. Q1 guidance below expectations, amid peers' weak outlooks.
Apellis Pharmaceuticals (APLS) [+8.9%]: Upgraded to buy from hold by Jefferies due to reduced competition concerns and increased doctor confidence in Syfovre.
Elanco Animal Health (ELAN) [+7.9%]: Merck Animal Health to buy its Aqua business for $1.3B in cash. Deal completion expected by mid-2024.
Losers!
Air Products (APD) [-15.5%]: Fiscal Q1 saw revenue, EBITDA, and EPS below expectations due to a manufacturing slowdown in Asia, especially China, softer helium demand, and impacts from an equipment sale and Argentina's devaluation. Q2 guidance and FY EPS forecast reduced by over 4.5% at midpoint.
DocuSign (DOCU) [-8.4%]: Merger talks with Hellman & Friedman and Bain Capital reported by Reuters as stalled.
Polestar Automotive (PSNY) [-7.2%]: CEO revealed to FT that Hertz sought waiver for 2024 vehicle purchases under a 65K, five-year deal; waiver granted to avoid early or low-priced sales of current models.
GlobalFoundries (GFS) [-6.7%]: Downgraded by JP Morgan to neutral from overweight, citing a more severe semi downturn and lag in mature/specialty foundry business.
McDonald's (MCD) [-3.7%]: Q4 EPS above expectations, revenue fell short; US comps slightly below forecasts with noted decline in low-income consumer spending and weaker international licenses, particularly affected by Middle East tensions. FY24 operating margin expected mid-to-high 40% range.
Tesla (TSLA) [-3.6%]: SAP to cease using Tesla vehicles over delivery delays and price changes; Bloomberg reported Elon Musk engaged in drug use with some Tesla and SpaceX directors.
Market Update
Trivia Answers
C) Short Selling is selling borrowed stocks with the aim to buy back later at a lower price.
B) The Rule of 72 is a way to estimate how long an investment will take to double. Just divide 72 by the expected annual return, and Bam!
B) Quantitative Easing is a monetary policy where the central bank buys securities to increase money supply.
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