At the beginning of June, specific macroeconomic trends take center stage. Supply shortages persist, inflation is on its way, economic reopening is changing spending patterns, and uncertainty about the direction of the pandemic has not ended.
eBay (NASDAQ:EBAY) is a company that I think can do well in this economic environment. The asset-light business model can protect against rising costs, and eBay is where consumers go when things run out everywhere else.
More importantly, eBay has done a great job of growing its profits over the past decade, which can sustainably fund its dividend payout. Let’s take a closer look at why eBay is my favorite dividend stock to buy in June.
eBay grew revenue at a rapid pace
Indeed, from 2012 to 2021, eBay grew its earnings per share at a compound annual rate of 23.6%. Earnings are key in determining a company’s ability to pay dividends. Of course, a company could finance dividends from savings or borrowings, but eventually these sources would be exhausted. The only sustainable source to fund dividends is earnings. In this regard, income-seeking investors may be encouraged by eBay’s solid earnings growth.
In its most recent quarter, which ended March 31, eBay’s revenue was down 6% year-over-year. The company is losing customers and engagement as economies reopen and consumers shift more of their spending to in-person stores. eBay does not own the inventory sold on its platform and leaves shipping to sellers. The asset-light business model should protect eBay from the rising costs plaguing other businesses.
Additionally, if supply shortages persist, consumers may turn to eBay’s platform for items sold elsewhere. eBay offers both auction and fixed price formats for sellers. Sometimes people who get their hands on sold-out items in stores list the products on eBay for a premium or put them up for auction which fetches higher prices. Since eBay considers a percentage of transactions as revenue, the increase in activity is good news.
Note that eBay only started paying a dividend in 2019 at $0.56 per share, but it has already increased it twice to $0.64 in 2020 and $0.72 in 2021. , eBay’s dividend payout ratio (dividends per share divided by earnings per share) was just 4.1% most recently, underscoring that eBay has plenty of room to continue raising its dividend.
Committed to a low-asset-intensive business
Income investors may be further encouraged by eBay management’s continued emphasis on an asset-light business model. This means that the company does not have to reinvest profits back into the business. Instead, it can return profits to shareholders in the form of dividends.
From 2011 to 2021, eBay’s total assets have grown from $27.3 billion to $26.6 billion. This means that eBay took the billions it earned in profits and returned them to shareholders. Of course, the depreciation could also be attributed to the decrease, but this highlights that management is not investing in fixed assets like order processing facilities.
Fortunately for investors, eBay is cheap with a price-to-free cash flow ratio of 16.6 and a price-to-earnings multiple of 2.7. An inexpensive valuation, robust earnings growth and asset-light business model are why eBay is my favorite stock to buy in June.
10 stocks we prefer to eBay
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Parkev Tatevosian holds positions at eBay. The Motley Fool recommends eBay and recommends the following options: July 2022 Short Calls at $57.50 on eBay. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.