Facebook Inc. (NASDAQ:FB): This Could Push The Stock Into “Buy” Territory

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January 1, 2013 3:01pm NASDAQ:SOCL

Jonathan Yates: Down about 42% from the $45 high after its initial public offering, Facebook Inc. (NASDAQ:FB) stock needs a way to keep investor interest into 2013. 

How about paying a dividend?

Facebook stock, at around $26, is up about 20% over the past few months, but still far from its $28 IPO price.

But with nearly $10.5 billion in cash, a Facebook dividend could drive the stock higher by making it more attractive to a wider range of investors.

Here’s why CEO Mark Zuckerberg should consider a Facebook stock dividend for the New Year.

The Case for a Facebook Stock Dividend

With more than 1 billion members and counting, Facebook is bringing in plenty of income.

Earnings per share rose 80% in the past year. Analysts expect those earnings to total 64 cents per share next year, and rise by 26% annually for the next half-decade.

That adds up to total earnings of almost $1.4 billion starting next year, increasing by more than $360 million annually.

Meanwhile, capitalexpenditures are falling.

Based on the past two years, it appears capital expenditures for Facebook will average $500 million annually. This quarter, capital expenditures are down to $171 million.

A 2% dividend starting next quarter would require 39 cents a share, or about $850 million a year, for a payout ratio of about 54%. That’s a very affordable payout ratio, easily leaving room for annual capital expenditures of $500 million.

As earnings rise for Facebook, the payout ratio will fall. Facebook could boost its dividend by a penny a quarter, while bringing the payout ratio down at the same time from the estimated increase in earnings of 16 cents a share.

Paying a dividend of around 2%, with the stated intention of increasing it annually, would put Facebook in a league with other tech heavies such asIBM Corp. (NYSE:IBM), Apple Inc. (NASDAQ:AAPL), and Oracle Corp. (NASDAQ:ORCL).

Facebook’s superior price-to-cash ratio and projected five-year growth rate demonstrate how it could easily pay a healthy dividend and increase it annually.

Facebook’s price-to-cash ratio is 3.98, compared to 17.45 for IBM, 17.67 for Apple, and 4.63 for Oracle. FB’s projected five-year growth rate for earnings per share (EPS) is 26%, compared with 9.92% for IBM, 20.86% for Apple, and 11.92% for Oracle.

Many insiders might not have sold if Facebook were offering a solid dividend that would increase over time. The company has been plagued by heavy insider selling after the lock-up period expired.

With a Facebook stock dividend, shareholders could write covered call and covered put options to profit.Mutual funds and other institutional investors that required income could now buy Facebook.

Federal Reserve Chairman Ben Bernanke is committed to low interest rates well into the future, and a growing dividend from Facebook will make it much more attractive than assets with meager yields.

Finally, a dividend would fight off the Facebook stock haters. A dividend would make it much more expensive to take a short position on Facebook, since you must reimburse the owners of the borrowed shares. A short float of 5% is considered troubling, and Facebook now has one of 5.4%.

Bottom Line: With investors on the fence about Facebook stock in 2013, a dividend could push the stock into “Buy” territory.

Related: Social Media ETF (NASDAQ:SOCL).

Written By Jonathan Yates From Money Morning

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