Tesla Could Pay A Cash Flow And Profit-Covered Dividend If It Wanted To

At Tesla, the narratives are pretty clear among the bulls and the bears. So far, however, the share price has proven the bulls right and left every bear on the sidelines in shame. So where do we go from here with Tesla? Is the share price a bubble? Well, I honestly don’t think that. Tesla is a different investment case today than it was last year. Even a Tesla dividend would be possible (although a Tesla dividend is unrealistic). 

2020 was a pivotal year for Tesla

2020 was a pivotal year for Tesla. The company was a cash-burning machine for years and on the verge of insolvency. But the hype around the stock and the rally led to the paradox that Tesla was able to pull itself out of the swamp by its head, merely issuing new shares without causing any disturbance to the stock markets. I also said that Tesla is almost on solid financial footing after the latest developments and a current debt-to-equity ratio of 60 percent. Tesla as a company was a bet, and I’ll say here without bias that the bulls won their bet. Another bet is the question of further share price potential. This bet is still on, and it is questionable whether the bulls will win this bet too.

Tesla stock is an appealing outlaw 

Well, overall, Tesla stock is more or less like an outlaw. Denounced as a bubble by people on the sidelines (mainly bears), it’s doing its thing and going up and up and up.

Currently, the Tesla stock has momentum on its side. From a technical perspective, this momentum rests on three factors. Firstly, any disciplining effect on the share price emanating from short sellers has disappeared over the past year. This trend continues despite the increasingly skeptical calls for a bubble.

Tesla: short interests
Tesla: short interests

Additionally, institutional investors are also increasingly buying into Tesla again, which is also bringing some momentum to the share price.

Largest Quarterly Institutional Transactions
Source: Largest Quarterly Institutional Transactions

And the third factor, alongside short interests and institutional buyers, is private investors. Let me be clear, I know there is no certainty about the extent to which retail investors can really move the market, but there are some people with a lot of knowledge and insights who assume that investors can move the markets:

In many ways, the retail investor has become a more powerful collective force than the professional investor, and they simply don’t care about the same things as the experts. In fact, individual investors now account for roughly 20% of stock-market activity on average and nearly one-quarter of trades on peak days, according to Joe Mecane, the head of execution services at Citadel Securities. The firm is the leading retail market maker in the U.S., handling 40% of the shares and options traded by individual investors.

The retail bros also don’t care about traditional parameters of valuation (P/E and P/S ratios) and could always trade out of a stock for free because of commission-free trading.

Checking the quantities – The bears’ thesis is falsified

However, anyone who limits the recent price trend to technical factors alone is thinking too briefly, in my opinion. As I said above, last year was a turning point that proved the bulls right when it comes to Tesla as a company. We can now see Tesla as a financially stable growth company and value the quantities accordingly. Of course, we have to take into account the pace at which Tesla is growing. Especially at the threshold from a loss-making business to a small break-even point, profit and cash flow can quickly double many times over. Analysts currently expect Tesla to close 2020 with earnings of USD 1.08 per share. But already in 2024, earnings are expected to exceed USD 8 per share. The same applies to the operating cash flow, which currently stands at around USD 4.71 per share and is expected to rise to USD 14.00 in 2024.

Earnings and cash flows for Tesla
Tesla’s earnings and cash flows for Tesla, source: www.DividendStocks.cash

Of course, there is room for doubt here. How realistic is it that Tesla will live up to these expectations? But even I, as a long-time doubter, do not find these expectations exaggerated. Tesla has recently shown that it can not only keep margins stable but is also capable of massively increasing profitability. Likewise, I agree with the analysts in expecting a massive increase in revenues.

Tesla's revenues and margins
Tesla’s revenues and margins, source: www.DividendStocks.cash

Tesla has recently shown strong cost discipline. It didn’t necessarily cut back on research & development costs (which I think is a good thing). The impact on profitability is just significantly lower due to the increased revenue. Operating costs have also remained stable over the past few years and even declined slightly.

Tesla R&D to reveneue, R&D expense, and total operating expense
Tesla R&D to revenue, R&D expense, and total operating expense, Data by YCharts

In addition, Tesla has shown in recent quarters that the expectations of the analyses were too conservative. Since September 2019, it has always exceeded analysts’ expectations, in some cases significantly.

Earnings surprise actual vs. consensus SeekingAlpha
Earnings surprise actual vs. consensus, source SeekingAlpha

Accordingly, the foundation has changed. Tesla is no longer the company on the brink, highly loss-making, failing to meet its forecasts, and disappointing analysts and shareholders. I was skeptical myself in the years before. But every rationally thinking human being has to admit when reality has caught up with his or her thesis and falsified it. We have to take this into account when valuing Tesla, which we will do in the following.

When will Tesla pay a dividend? Actually, Tesla could afford a dividend by the end of 2024

So if we assume that Tesla makes a profit of 8.06 USD per share in 2024, then we have a total profit of 8.9 USD billion. If we take current operating costs of USD 4.1 billion and assume that they will rise to USD 6 billion by 2024 (i.e., plus 50 percent), then Tesla definitely has room to pay a dividend. If Tesla pays out only 1 USD billion of the nearly 9 USD billion, this makes about 0.9 USD per share, which corresponds to an initial dividend yield of 0.1 percent at the current share price of about 880 USD. That’s extremely low, of course, but look at Microsoft. In 2003, the dividend yield was only 0.3 percent.

Is a Tesla dividend realistic?

Well, that is another question. I don’t think a dividend payment is very realistic. Tesla itself does not expect to pay a dividend.

 We intend on retaining all future earnings to finance future growth and therefore, do not anticipate paying any cash dividends in the foreseeable future.

Tesla is doing it like other growth companies. Amazon, for example, still refuses to pay a dividend and also uses its profits to fund further growth. Conversely, Elon Musk is unpredictable and does what he thinks is right. So who knows if he won’t change his mind. Nevertheless, I would not want to bet on a Tesla dividend.

Let’s bring the quantities to a fundamental valuation

So if Tesla would pay a dividend, a low entry dividend yield would not be an obstacle for me to invest in. However, the result is different if we take the expected profits and measure them against the current share price. So let’s take the expected earnings and cash flows for 2024. Based on the current share price, earnings of USD 8.06 per share and operating cash flow of USD 14 in 2024 equates to a P/E ratio of 109 and a price/operating cash flow ratio of 62. That’s quite a lot. Especially the cash flow multiple is relatively high. For growth companies, profit is not always the best metric, but cash flow usually gives a good indication even for growth companies. And to remind you, we’re not taking the current numbers here, but the expected numbers for 2024.

Taking risks into account

In my view, the figures do not yet make Tesla a bubble. The share price has priced in future growth. I am also optimistic that Tesla will achieve these growth targets operationally. Nevertheless, the question is to what extent the Tesla share still has real upside potential in the coming years. There are also other risks. Issuing additional shares could further dilute earnings and cash flow per share. Elon Musk has recently shown that he is willing to issue new shares when he thinks that such a step is opportune.

It should also be clear that Tesla’s competitors are not sleeping. Registrations of electric cars are increasing more and more every year. This also makes the market interesting for other players (keyword: Apple. Anyone who thinks that Tesla, as a pioneer, will inevitably benefit from this is mistaken. Look at the past and see how the great pioneers and heroes of the early days performed in the fields they established (AltaVista and Yahoo in search designs, IBM in personal computing, etc.). No market share is safe in capitalism and competition. Accordingly, I would be cautious about projecting future profits too far into the future.

Conclusion – an outlaw and a betting slip

We have to weigh up the opportunities and risks with caution. Momentum and sentiment currently speak strongly in favor of the Tesla share. Bears must acknowledge that the narrative of the almost failed company has been falsified. Tesla is on the right path. The bulls have won their bet.

If we consider Tesla’s operational performance and prospects, the current share price is not yet a bubble. But anyone who buys more shares now is betting again. The shares may correct sharply after the recent run. Besides, Tesla is now in some additional debt. It now has to prove that it can live up to the high expectations that have been priced into the share price every quarter. This bet could work out, but for me, the odds are currently too unfavorable.

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