Motley Fool: Promising PayPal after recent Apple partnership

Financial technology (“fintech”) company PayPal Holdings (Nasdaq: PYPL) flourished early in the pandemic, as online shopping and digital payments grew strongly. But those tailwinds have faded, with inflation curbing growth. Pessimism has dragged the stock down over 83% from its all-time high. PayPal may never again grow as quickly as it did during that period, but the business remains solid and shares recently traded at their cheapest valuation in history.

The company began to regain its financial momentum late last year. It delivered another round of solid results in the most recent quarter, with revenue up 7% to $7.3 billion and net income of $1 billion (up from a year-ago loss of $341 million).

PayPal is the most accepted digital wallet in North America and Europe, and it’s the clear leader in online payment processing: Its 41% market share is roughly equivalent to that of its next four competitors combined. That bodes well for the company.

The company’s recent partnership with Apple is also promising: U.S. consumers could add PayPal- and Venmo-branded credit and debit cards to their Apple Wallets. (PayPal owns Venmo, too.) That would allow them to be used via Apple Pay, the most popular in-store mobile wallet among U.S. consumers. (The Motley Fool owns shares of and has recommended PayPal.)

Ask the Fool

Q. Are Social Security benefits increasing again in 2024? – H.G., Ashland, Kentucky

A. They are, indeed. Social Security benefits are adjusted for inflation via cost-of-living adjustments (“COLAs”) and are increased in most years. The increase for 2024 is 3.2% – close to the long-term average annual rate of inflation. Inflation has sometimes been high, which is why the 2023 increase was a hefty 8.7%, on the heels of 2022’s 5.9% bump. The nine increases before that were all less than 3%, with a 0% increase for 2016.

Q. Does a company’s management want its stock price to be high? – V.N., Honolulu

A. Typically, it does. But a stock’s price trending higher doesn’t mean that the company collects more income that way. The company received money for the shares when they were first issued, perhaps via an initial public offering (IPO) or a later additional stock offering. Afterward, the shares trade in the open market between investors who buy and sell them. (It’s a bit like a collectible card company making money by selling cards – after which the cards’ values rise and fall depending on what buyers and sellers think they’re worth.)

Still, a high stock price can be useful for a company. If it wants to buy another company with stock instead of cash, for example, it will need fewer shares to do so. And if it wants to raise money by issuing more shares, it will get more dollars per share. Employees who have stock options (including top executives) will also want a high stock price.

In contrast, a lower stock price means a lower total market value, making a company more vulnerable to being pursued by a would-be acquirer.

My Dumbest Investment

My most regrettable investment was spending $14,000 on shares of Seadrill because the dividend was just too good to ignore. I sold before its eventual bankruptcy, walking away with about $500. – D.P., online

The Fool responds: Seadrill, an offshore drilling specialist serving oil and gas companies, has actually filed for bankruptcy protection twice – in 2017 and in 2021. The fact that it’s still around is a reminder that filing for bankruptcy isn’t necessarily the end for a company. A Chapter 11 filing gives a company some time to reorganize itself and, hopefully, emerge in a healthier condition – often with new shares of stock. Its old shares are often left with little or no value, though.

Fat dividends are understandably enticing, but remember that a dividend yield is a simple fraction: the current annual dividend amount divided by the current stock price. So if the stock price sinks and the payout remains the same, the dividend yield will rise. For example, a quarterly $0.50 dividend is $2 annually. Divide that by an $80 stock price and you’ll get 0.025, or a 2.5% dividend yield. If the stock falls to $40, the yield will be $2 divided by $40, or 0.05 – 5%. Some steep yields are from healthy companies generating lots of cash, while others are from companies in trouble. Research any portfolio candidate before buying, and keep an eye on your holdings, too.