Meta paid no dividend for twelve years — so how do you value a stock?

On February 1, 2024, Meta declared a dividend for the first time in its history: $0.50 a share, twelve years after going public. The stock jumped about 20% the next day. That spring, Alphabet did the same thing. For over a decade, neither company had paid shareholders a cent.

Which raises the question every equity analyst has to answer: if a company pays no dividend, how is anyone valuing it? You cannot use a dividend discount model: with zero dividends it returns a value of zero, which is plainly wrong. That gap, between companies you can value from what they pay out and companies you cannot, is exactly the split CFA Level I equity valuation is built around. Equity is one of the three largest topics on the exam, and valuation is its core.

Two ways to answer "what is it worth?"

• Intrinsic valuation builds value from a company's own cash flows. The dividend discount model lives here.
• Relative valuation infers value from what comparable companies trade for. Multiples live here.

Good analysts run both and pay close attention when they disagree.

Intrinsic value: the dividend discount model

A stock is worth the present value of every dividend it will ever pay. For a mature firm whose dividend grows at a steady rate g (with g < r), that infinite stream reduces to the Gordon growth model:

A share paying a $2.00 dividend next year, growing 4%, at a 10% required return:

Two traps live in that one line. First, the numerator is next year's dividend; given the dividend just paid (D0), compute D1 = D0 × (1 + g) first. Second, the model breaks when g approaches or exceeds r. And it cannot value a company that pays nothing at all, which is why, for twelve years, no one valued Meta with a DDM. Dividend-less growth firms are valued with a two-stage model or a free-cash-flow model instead.

That also explains the 20% pop. A first dividend is a signal: management is telling the market the hyper-growth phase is maturing into steady, cash-generative maturity, the stage where a dividend model finally fits.

Relative value: the multiples

Multiples express price against a fundamental, and four show up constantly:

• P/E — the workhorse. Watch for one-off items distorting earnings; leverage depresses EPS, so comparing P/E across firms with different debt loads misleads. For cyclicals it inverts: a high P/E on depressed trough earnings can be a buy signal.
• P/B — best for asset-heavy businesses (banks, insurers) where book value is meaningful. A P/B below 1.0 means the market values the firm below its book equity — sometimes a distress signal, sometimes just low expected returns on that book.
• P/S — useful for unprofitable growth firms, because sales stay positive even when earnings do not.
• EV/EBITDA — capital-structure-neutral, so it cleanly compares firms with different leverage.

For the decade Meta paid nothing, this column — not the DDM — is how the market valued it.

When the two disagree

The Gordon model is hypersensitive: take the example above and cut growth from 4% to 3.5%, and the value falls from $33.33 to $30.77, a nearly 8% move from a 50-basis-point assumption. So when your intrinsic and relative estimates diverge sharply, treat the disagreement as information. Ask which input is least certain, rather than assuming one method is simply wrong.

One discipline question the exam loves: the discount rate in the DDM is the cost of equity (from CAPM), not the WACC. WACC belongs to free-cash-flow-to-the-firm models. Swapping them is one of the most common and most avoidable valuation mistakes.