This Dirt Cheap AI Stock Just Announced Its First-Ever Dividend

When you hear the phrase "AI stocks," PayPal (NASDAQ: PYPL) may not be the first company that comes to mind, and understandably so. And to be fair, there are some incredibly exciting chipmakers, AI software companies, and other more direct plays on artificial intelligence.

However, to overlook PayPal's AI momentum would be a big mistake. About a month ago, PayPal announced a partnership with Alphabet's Google to develop commerce solutions and to embed PayPal solutions in Google's platforms. More recently, PayPal and OpenAI announced a partnership for PayPal to become the first payment wallet integrated into ChatGPT. In addition to these, there are several other ongoing AI initiatives within the business.

Not only does PayPal have strong AI momentum, but recent results have been impressive, and the stock trades for a dirt cheap valuation. PayPal also just announced its new dividend program, and now could be the best time to add the fintech leader to your portfolio.

Image source: PayPal

Stellar results provide financial flexibility

PayPal's third-quarter results surpassed analysts' expectations in virtually every meaningful way. Revenue and adjusted EPS increased by 7% and 12%, respectively, and total payment volume increased 8% to an annual pace of more than $1.8 trillion. Margins remain strong, and the company added about 300,000 active accounts in the third quarter.

One key point is that PayPal is so profitable and is in such great financial shape that it has tremendous flexibility when it comes to deploying capital. The company has $14.4 billion in cash and equivalents on its balance sheet and should generate about $7 billion in free cash flow for the full year.

Buybacks have been the major priority, presumably to take advantage of the cheap valuation (more on that in a bit). The company has repurchased $5.7 billion in stock over the past four quarters, and this is likely to remain the major use of cash for the foreseeable future.

The newest dividend stock

Along with its third-quarter results, PayPal announced its first-ever dividend, which will be paid on Dec. 10 to stockholders of record as of Nov. 19.

To be sure, the initial payout isn't huge. PayPal's quarterly dividend is $0.14 per share, which translates to an annualized dividend yield of about 0.8% based on the stock price as of this writing. But there are two important points to keep in mind.

First, PayPal made clear that this is an ongoing dividend program, so it is essentially telling investors it will continue to pay dividends for the foreseeable future.

Second, and more importantly, PayPal is targeting a 10% dividend payout ratio based on adjusted net income. So, as PayPal's net income rises over time, the dividend should get larger. Management has said that it is targeting a 20% (or more) earnings growth rate in a few years, and if the company can make this happen, PayPal could become an excellent dividend growth stock.

PayPal is ridiculously cheap -- for now

In its third-quarter earnings, PayPal increased its full-year EPS guidance, now expecting $5.37 per share in adjusted EPS at the midpoint of its range. At the current price, this means that PayPal trades for about 13.5 times full-year earnings, and for an even lower multiple of its expected free cash flow.

As a final point to consider, although PayPal has some impressive AI initiatives in progress, it's important to realize that they aren't reflected in the numbers yet. The ChatGPT integration, Google integrations, agentic commerce solutions, and several other recent developments aren't going to roll out until 2026.

To put it mildly, PayPal looks ridiculously cheap right now considering its strong results and future opportunities. I've been buying shares aggressively in my own portfolio, and I'm confident that in a five to 10-year time frame, I'll be very glad I did.

Matt Frankel has positions in PayPal. The Motley Fool has positions in and recommends Alphabet and PayPal. The Motley Fool recommends the following options: long January 2027 $42.50 calls on PayPal and short December 2025 $75 calls on PayPal. The Motley Fool has a disclosure policy.