Meta Stock: Dividend Initiation Game Changer NASDAQ META

Meta Platforms, Inc. stock surged >20% after announcing a tripling in Q4 profit and its inaugural dividend. It's a long-term 'Buy'.

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I started covering Meta Platforms, Inc. (NASDAQ:META) stock in October 2022 when it was trading at $99.2 per share. At that time, many people were selling their META long positions, and some even went short, expecting lower lows in 2023.

However, history has proven otherwise. Meta's stock surged more than 20% on Friday following the announcement of a tripling in Q4 profit and the company's initiation of its inaugural dividend. This was the fastest increase in market capitalization in the history of modern American companies, slightly outperforming Apple (AAPL), according to Bloomberg data.

With a 25% increase in revenue to $40.1 billion, Meta's Q4 showcased the ongoing rebound in the online ad market. The firm's net income soared to $14 billion from $4.65 billion a year earlier. The company's first-ever quarterly dividend of 50 cents per share, scheduled for March 26, and a $50 billion share buyback were well-received by investors.

The dividend announcement was particularly lauded, signaling to investors a new phase of maturity for the tech giant. The market reaction was absolutely justified, and META, while not "mountains of gold," should have a fairly comfortable total return with less selling pressure from insiders.

The empirical evidence supports the idea that dividend-paying stocks command a pretty impressive premium over their non-dividend-paying peers. This was evident in the immediate rise of META's stock following the announcement of its first dividend.

The mere fact that there is a dividend should put more money in the coffers of Mark Zuckerberg and the rest of the firm's executives, which means less pressure on market prices and fewer obstacles to their growth.

META is currently trading at 24x FY2023 earnings, 5.67% below its historical norm. The consensus forecast assumes compound annual EPS growth of around 10.35% for the next 6 years, with FY2025 at ~21x, according to Seeking Alpha data.

Assuming that a P/E ratio of 24x remains in place until the end of FY2025 and the analyst consensus of $22.7 is actually achieved, the META stock should be worth $544.8 in less than 2 years, which represents an upside potential of around 14.6% from the current price.

Despite the risks that currently surround META, the recent news of initiating dividends, even at such a modest yield level, still makes the company's stock attractive after Friday's 20% rise in the stock price. In my opinion, META stock simply reflected a premium to its valuation with this lightning-fast move, which it deserves based on financial theory and market dynamics.

Moreover, by receiving $2 per share this year, CEO Mark Zuckerberg and other executives are in a more advantageous position, which should incentivize them not to sell their shares in the public market. This should support META's stock price as supply is now expected to be more limited.

According to my calculations, META has a growth potential of 14.6% by the end of 2025, which still makes the company look attractive in the long run. Given all the factors, I'm reiterating my previous "Buy" rating today. At Beyond the Wall Investing, we offer much more than just articles. Join us to access model portfolios, regular updates, a chat room, and more.