Meta Announces Dividend Status, but Smart Investors Shift Focus to a More Promising Tech Player

• Meta Platforms surprises with its first-ever dividend, paying shareholders $0.50 per share on February 22, yielding around 0.5% annually. As the dividend distribution increases, the yield is expected to grow over time alongside significant share buybacks, with an additional $50 billion allocated for buybacks.

• Despite Meta's robust Q4 growth, uncertainties loom, including the possibility of increased regulation in the social media industry and the metaverse. The significant investment in AI, particularly in the metaverse-focused subsidiary Reality Labs, raises questions about potential returns.

• IBM emerges as a more attractive option for investors seeking stability, clear AI strategy, and dividends. IBM's clear focus on AI, robust free cash flow of $11.2 billion in 2023, and an anticipated $12 billion in 2024, coupled with a consistent dividend history since 1916, make it a compelling choice. IBM's dividend yield of nearly 3.6% and lower uncertainty compared to Meta position it as a more secure investment despite slower growth.

The announcement of Meta Platforms' first-ever dividend was the major surprise in the company's fourth-quarter financial report released last week. On February 22, Meta will pay shareholders of record $0.50 per share. That equates to a dividend yield of around 0.5% when annualized.

As Meta increases its distribution, this dividend yield will probably rise over time, even though share buybacks will still play a significant role. Meta revealed that an additional $50 billion had been set aside for share buybacks in addition to the dividend announcement.
In 2023, Meta invested close to $20 billion on repurchasing its own shares; assuming the dividend stays the same, it would consume slightly more than $5 billion in the next year.

There is a lot of long-term uncertainty, even though Meta reported robust growth in Q4 with sales up 25% year over year and net income more than doubling. One is the possibility of further regulation for the core social media industry.
Senator Thom Tillis remarked, "We could regulate you out of business if we wanted to," during a recent Senate hearing on child safety that included prominent social media CEOs.

The huge sums of money that Meta has invested on AI and the metaverse likewise have hazy potential returns. The metaverse-focused subsidiary of Meta, Reality Labs, had an operational loss of $16 billion in 2023, and the corporation is investing more money in AI hardware. It makes sense to enhance its multiple platforms with AI features, but doing so would be costly.

Read Also: Social Media Giants Rake in $11 Billion from Kids' Ads, Study Says

IBM a Better Deal?

If one is not convinced about Meta's prospects, International Business Machines (IBM) is a more advantageous option. IBM has a very clear artificial intelligence strategy: using a combination of software and consulting services, it helps its corporate clients use AI technologies.

Although IBM's watsonx AI platform plays a significant role in this approach, customer acquisition is mostly achieved through consultancy. In its Q4 report, the firm revealed that client pledges to use AI more than quadrupled from Q3 to Q4, with the consultancy division accounting for two-thirds of total revenue.

In 2023, IBM generated $11.2 billion in free cash flow. The company is expected to rise in 2024 due to the high demand for its AI products and services. With $12 billion in free cash flow projected for 2024, the price-to-free cash flow ratio will be around 14, or nearly half of Meta's.

Compared to Meta, IBM is expanding more slowly; mid-single-digit revenue growth is anticipated by 2024. But there is less uncertainty in IBM's business. Demand for IBM's corporate software and services is subject to fluctuations in the economy, but unlike Meta's social networking business and its metaverse venture, the corporation is not dependent on a moonshot. Rather, it faces neither of these existential risks.

The dividend comes next. Since 1916, IBM has consistently paid a quarterly dividend, and for almost thirty years, the company has increased the dividend yearly. With the most recent quarterly dividend payment of $1.66 per share, IBM stock has a dividend yield of almost 3.6%, which is more than double the modest 1.4% yield of the S&P 500.

There is enough of free cash flow to support the dividend. Over the course of the next year, IBM plans to pay out around $6.1 billion in dividends, which will consume just over 50% of its free cash flow. There is still plenty of money available for acquisitions, debt reduction, and maybe even a return to share buybacks. Following the completion of its massive acquisition of software business Red Hat in 2019, IBM ceased all share buybacks.

Over the course of the previous year, IBM's shares had increased by about 40% as investors began to believe in the company's growth story. Even if IBM isn't a growth business like Meta, its stock is still a better investment due to a discounted price, less uncertainty, and a far larger dividend.

Related Article: S&P 500 Up 1.07%: Key Sectors Power Index to New Peak