Shares of Google parent Alphabet (GOOGL), Facebook parent Meta Platforms (META), and Amazon.com (AMZN) have performed remarkably well this year, contributing to shareholders’ portfolios despite recent losses. However, all the gains have been solely from stock appreciation as none of the three companies pay cash dividends.
But perhaps it’s about time they did.
We know what you might be thinking. Conventional wisdom suggests that growth stocks should reinvest their free cash flow to fuel further growth instead of distributing dividends. And that’s a valid point. After all, growth requires investment, and some argue that dividends aren’t truly significant. Yet, dividends have been a staple for centuries. Eventually, there comes a moment in every company’s life when their free cash flow becomes robust enough to accommodate both reinvestment and dividend payments.
Let’s look at Microsoft (MSFT) as a prime example. When the software giant went public in 1986, its annual sales were less than $200 million. Fast forward to 2003, after 17 years, and Microsoft’s sales had grown to a staggering $32 billion. It was at this point that Microsoft started paying dividends. Since then, the company has consistently increased its sales by an average of 10% annually while also distributing $26.59 per share in dividends.
Apple (AAPL) has a slightly more intricate story. It began paying dividends approximately seven years after its initial public offering in 1980 but was compelled to halt dividend payments in 1995 due to financial struggles. However, with co-founder Steve Jobs’ return in 1997, Apple charted a new course, and after 15 years, it reintroduced dividend payments.
Determining the right time to initiate dividend payments is more of an art than a science. However, if we follow the examples set by Apple and Microsoft, it seems reasonable to consider a window between 10 and 15 years after an IPO. By this measure, the tech giants mentioned earlier have fallen behind. Amazon went public in 1997, a whopping 26 years ago. Alphabet followed suit in 2004, approximately 19 years ago. As for Meta Platforms, the relative newcomer, it went public in 2012, a relatively short 11 years ago. It’s high time these companies start considering the introduction of dividends.
Ultimately, deciding to pay dividends is a strategic move that signifies a company’s maturity and ability to manage their free cash flow effectively. Alphabet, Amazon, and Meta Platforms have shown remarkable growth over the years, but it’s time for them to take the next step and embrace the responsibility that comes with being established industry leaders. By initiating dividend payments, they not only reward shareholders but also showcase their commitment to long-term sustainability and shareholder value.
The Potential of Dividends for Tech Giants
Dividends have long been valued by investors as a reliable source of income. While many tech giants have traditionally shied away from offering dividends, there is a growing sentiment that companies like Microsoft, Alphabet, and Meta should consider adopting a dividend policy.
Dividend Yield Comparisons
Microsoft stock currently offers a modest dividend yield of approximately 1%. In order for Alphabet and Meta to achieve a similar yield, they would need to allocate around 30% of their free cash flow generated over the past year, according to Bloomberg. This is not an unreasonable request, as dividend-paying companies in the S&P 500 have already distributed 55%, or $600 billion, of their $1.1 trillion in free cash flow over the same period. This leaves plenty of cash flow for future growth and provides a margin of safety.
Shifting Buybacks to Dividends
Alphabet could potentially achieve the desired dividend yield by reallocating a portion of its buyback spending. Over the past year, Alphabet has spent approximately $60 billion on buybacks. By diverting one-quarter of this amount to dividends, Alphabet could enhance its shareholder returns while maintaining its capital allocation strategy.
The Power of Dividends for Non-Payers
As for other non-dividend-paying companies in the S&P 500, they too could tap into the benefits of dividends. Excluding Alphabet, these companies have collectively spent around $140 billion on buybacks in the past year. By redirecting a portion of these funds to dividends, these companies can both reward their shareholders and potentially attract a broader investor base.
Amazon’s Unique Challenge
While Amazon would face a slightly greater challenge in initiating a dividend program, it is not an insurmountable one. Currently yielding only 0.6%, Amazon would need to make approximately $13 billion in annual dividend payments to achieve a 1% yield. However, the company’s free cash flow has fluctuated significantly in recent years, making it challenging to establish a stable dividend policy. Nonetheless, with projected free cash flow of $31 billion in 2023, representing a 40% payout, there is potential for Amazon to follow in the footsteps of its tech counterparts.
Recognizing the Importance of Dividends
Ultimately, dividends have proven to be an essential aspect of long-term stock returns and are favored by investors. Considering the vast amounts of cash held by these tech giants, a move towards implementing dividends would likely be welcomed by shareholders. By adopting a dividend policy, companies like Microsoft, Alphabet, and Meta can further solidify their position as investor-friendly entities.