So, who is next?
The return of the cash nexus is coming for the tech companies.
“So, who is next?” After the dam holding back tech dividends burst earlier this year, that’s the question making the rounds. The easy answer is all of those that can afford it—those with ample, steady free cashflow. The more interesting question is which of the tech giants can’t or shouldn’t?
Take for instance, a large internet retailer reporting next week. Over the past decade this company has moved aggressively and successfully into internet infrastructure services. The standard argument against tech companies paying dividends is that they need to get big to have the scale needed to generate the profits that could be distributed as dividends. As a retailer, gross sales are a little misleading because margins can be thin. But this company had gross profits in 2023 of $270 billion. We can all agree that it is a fully scaled operation.
But what about profitability? Here it gets trickier, because net income is only one measure of profitability in support of a dividend. Particularly for complex, asset-intense businesses, you also want to look at Cashflow from Operations and the Capital Expenditures being used to propel the business. Subtract one from the other and you have free cashflow available to support a dividend. In the table below, you can see those figures for the past decade. They show two trends. The first is remarkable growth. The second is the high cost of that growth and its variability. The company can certainly afford a “modest” dividend. An annual outlay of $10 billion or so is probably sustainable. But it’s not clear that that is a great idea. The company’s share count has been increasing by a bit more than 1% per year as the company pays employees partially in shares. Given the variability of the company’s cashflows and the rising share count, a $10 billion dividend could become a burden if business were to soften. So I’d say it’s a close call, especially as long as long as the company’s massive capital expenditures, running at $50-$60 billion per year, continue. A $10 billion dividend translates into a 0.5% yield at the per share level, similar to that of the other tech leaders that announced dividends earlier this year. Because the tech sector is coming to terms with the return of the cash nexus, I expect this company might do so this week as well, but it is not a open and shut case.
The other leader reporting next week is a multi-faceted consumer-oriented technology company. Notably, the company pays a dividend and has for years. But as you can see in the table below, the company leans strongly in the direction of buybacks, having purchased an astounding $607 billion in stock over the past decade, reducing its share count by 36%. The company uses just about all of its free cashflow on one or the other, but leans strongly in favor of buybacks: 5 to 6 dollars on buybacks for each dollar in dividends. With its steadily rising free cashflow, the company could easily shift its priorities, but they may not feel any particular pressure to do so: their shares yield the same 0.57% that the new tech dividend payers yield.
That being said, look for a dividend increase of some size. This is the quarter when this company normally raises its payout. In past years, it has been one penny per quarter (4 cents per year). I expect a bigger-than-average increase this year as the return of the cash nexus makes its presence felt.
It’s worth repeating that leading tech companies introducing (or increasing existing modest) dividends and having those income streams be material enough to attract dividend investors in a stock market are two separate phenomena. These are welcome developments, to be sure, but it is early days in the transformation of the US stock market into a cash-based business investment platform.
(Not investment advice in regard to these securities, or any other securities; consult your financial advisor. Seriously.
)