Can Shopify’s Impressive Growth Be Paired With Future Dividend Payouts?

Shopify Inc. (TSX:SHOP) has never paid a dividend. Can it afford to do so?

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Shopify Inc (TSX:SHOP) is perhaps Canada’s best known tech stock. It was for a time the biggest company in the country going by market cap, until the 2022 tech bear market took it down a few pegs. If the stock’s current momentum continues, it might regain the top spot in 2024.

The reason Shopify’s stock is rising so much is because the company is growing rapidly. In its most recent quarter, Shopify’s revenue grew at 26% year over year. In 2020, the company’s revenue grew at 86%. This, of course, implies that there has been deceleration in the rate of revenue growth, but no company continues growing at near triple digits forever. Shopify’s continued high double digit growth eight years post-IPO is impressive.

The question is, “Can this impressive growth be paired with dividend payments?” Shopify has never paid a dividend before, but some of its big tech peers have paid them. Many tech companies have done buybacks. In this article, I will explore whether Shopify can afford to pay a dividend while continuing its impressive growth streak.

Shopify’s growth

One thing that Shopify stock has always had going for it is impressive growth. The company’s revenue growth rate has varied between 13% and 90% in the eight years since it went public. In 2020, it went all the way up to 86%. Since then, the growth rate has decelerated. At one point, in 2022, revenue was growing at just 13% year over year – SHOP’s slowest growth rate on record. In the most recent quarter, revenue grew at 26%, which is not quite what this company was doing in the COVID-19 period, but still quite good. The company also recently turned free cash flow positive, which can be considered “growth” from the unprofitable base period.

Shopify’s earnings and free cash flows

As we’ve seen, Shopify is clearly a high growth company. However, mere revenue growth cannot fund a dividend, at least not sustainably. To a pay a dividend long term, a company needs profit – positive earnings and free cash flows. For most of its history, Shopify has not had those. However, it became free cash flow positive recently. In its most recent quarter, SHOP delivered:

  • $1.7 billion in revenue, up 26%.
  • $56.2 billion in gross merchandise volume, up 22%.
  • $901 million in gross profit, up 36%.
  • $718 million in net income, up 558%.
  • $276 million in free cash flow, up from a loss.

So, Shopify can afford to pay a dividend of up to $276 million. I use free cash flow rather than earnings as the measure of dividend-paying ability, because GAAP earnings includes non-cash factors. If SHOP paid all of its free cash flow out as a dividend, it would have a 0.21% dividend yield. That would not affect shareholders’ wealth very much, but would impede the company’s ability to invest in growth.

Foolish takeaway

Ultimately, Shopify should probably not pay a dividend. It’s still a fairly young company and it can justify using shareholders’ money on growth rather than dividends. If SHOP were to pay all of its free cash flow out as a dividend, it would barely give investors anything, but would reduce the money available to invest in growth by $276 million. That money is better re-invested in the business.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Shopify. The Motley Fool has a disclosure policy.

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