Three of the most dominant tech companies in the world — Facebook, Amazon and Google parent Alphabet — have never paid a dividend to shareholders, instead choosing to use their available capital to generate high growth through acquisitions and investing in internal businesses, but may be compelled to once they mature and growth slows.
Facebook, Amazon and Google parent Alphabet have amassed a combined cash balance of more than $290 billion as of the end of last year, but have paid no dividends to shareholders.
In its most recent annual report, Facebook explicitly stated that “we do not expect to declare or pay any cash dividends in the foreseeable future” and that it will continue to retain earnings to finance its businesses; while in its latest annual report, Alphabet said it will continue to use capital “to invest for the long term growth of the business.”
Dryden Pence, chief investment officer at Pence Wealth Management of Newport Beach, Calif., told Forbes that Facebook, Alphabet and Amazon are still in their “hyper growth phase” and are using their cash to acquire other firms or invest in their businesses such as Amazon’s one-day shipping service or Google’s effort to expand its data center footprint.
Pence added that while introducing a dividend would attract investors looking for yield it “isn’t exactly the best use of their money at this juncture in their growth cycle.”
David Bahnsen, chief investment officer at The Bahnsen Group, a wealth management firm based in Newport Beach, Calif., told Forbes he thinks Facebook, Alphabet and Amazon will ultimately pay dividends, but perhaps “many years from now” when they realize “shareholders have to be monetized.”
Andrew Graham, managing partner of Jackson Square Capital, an investment advisory firm based in San Francisco, told Forbes that paying dividends would only benefit Facebook, Alphabet and Amazon when growth from their core businesses slows, M&A opportunities are limited and investors demand shareholder returns (in the form of dividends or buybacks) instead.
Pence said that while there have been exceptions, like Broadcom, which has raised its dividend consistently for several years despite double-digit growth revenue growth, tech companies are more likely to pay dividends later on in their growth cycles rather than early on. But the biggest tech firm of all, Apple, has had an erratic dividend history. Apple paid dividends consistently from 1987 to 1995, when the company found itself strapped for cash. Seventeen years later in 2012, flush with cash from sales of a host of wildly popular products but with annual revenue growth plateauing, Apple restarted paying dividends again. Other tech giants started paying dividends fairly recently. Microsoft began paying in January 2003, Cisco did not begin until March 2011, and Intel only began last September.
Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, told Forbes that 82.4% of the companies in the S&P 500 information technology sector (which includes Apple, Microsoft, Intel and Cisco) currently pay a dividend. (However, Facebook and Alphabet are in S&P’s communications services sector, while Amazon is in consumer discretionary.) Overall, however, the percentage of S&P 500 companies paying dividends has been falling – as of the first quarter of 2021, 385 stocks, or 76.2%, in the index paid a dividend, the same as in the fourth quarter of 2020, but down from the 413 which were paying in first quarter of 2020. That decrease is partly attributable to the pandemic which prompted some companies to preserve cash and suspend dividends last year.
Pence noted that since investors that own Facebook, Alphabet, and Amazon are buying them because they are dominant companies with exceptional growth numbers – these companies are likely better off repurchasing stock to pump up share prices. Indeed, he notes that Facebook has authorized $34 billion in stock repurchases since 2015 while Alphabet has authorized $80 billion.
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