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Dividend payments are the latest sign of Big Tech’s financial strength
(Bloomberg) — After years of chasing growth at all costs, technology companies are following the old-school value company playbook: paying dividends. Wasting more money than they can spend, the switch to regular payment provides further evidence of companies’ financial strength.
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Several technology companies have introduced quarterly payments this year, and although the yields are small, the news sparked huge rallies as investors took the launches as a sign that the group can continue to provide robust cash flows.
announced a dividend of 20 cents per share last month, generating a 10% gain in shares of Google’s parent company. Meta Platforms Inc. introduced a 50-cent dividend in February, which contributed to a historic rise in shares. also launched dividends this year.
“Dividends will be a play for big tech in the future,” said Mark Iong, equity fund manager at Homestead Advisers. “I think if you don’t pay it will be interpreted as a sign that your business is more volatile.”
The new dividends, in some cases, were accompanied by sizable buybacks, demonstrating a renewed focus on shareholder returns as artificial intelligence acts as a tailwind to growth, a combination that investors hope will continue to support earnings in the future. share prices.
“What’s exciting is that they are distributing dividends and buybacks simultaneously, while cutting costs and growing, which means they are putting the pedal to the metal to make profits across the board,” Iong said.
Among the so-called Magnificent Seven, only Amazon.com Inc. and Tesla Inc. do not pay dividends. “It will be difficult for Amazon not to follow suit,” Iong said.
Reached for comment, an Amazon spokesperson pointed to the company’s recent earnings call, during which Chief Financial Officer Brian Olsavsky said the focus is on capital expenditures and paying down debt, as opposed to shareholder returns. Tesla said on its website that it does not anticipate paying any cash dividends in the near future.
Nvidia Corp.’s quarterly dividend of 4 cents per share. represents a yield of 0.02% and has not been increased since 2018. The chipmaker generated $28 billion in cash last year and returned less than $400 million to investors in dividends and $9.5 billion in shares buybacks. Cash from operations is expected to more than double to $58 billion this year, according to average analyst estimates compiled by Bloomberg.
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Shares of Facebook’s parent company are up about 35% this year, while Alphabet is up 21%. Both outperformed the Nasdaq 100 index’s 7.9% gain.
High cash flow and strong balance sheets are the main reasons megacap technology stocks are loved on Wall Street. The six largest megacaps are projected to generate more than $416 billion in combined free cash flow this year.
Buybacks remain in favor
Still, share buybacks – which support earnings per share by reducing the number of shares – remain the preferred way for these companies to return money to shareholders. The Magnificent Seven has spent nearly $58.5 billion on buybacks this year, while paying out less than $11 billion in dividends, according to data compiled by Bloomberg.
Meta’s dividend came with a $50 billion buyback, while Alphabet’s was accompanied by a $70 billion buyback authorization. Apple Inc. – which began paying dividends more than a decade ago – last week announced the largest buyback in US history: $110 billion, surpassing the previous record of $100 billion set in 2018.
“These companies are still in the grip of buybacks and the dividend yields are not significant, but I think it is very telling that these companies are moving in that direction,” said Daniel Peris, senior portfolio manager at Federated Hermes and the author of several books on dividend investing.
“As a dividend investor, a maturing company declaring a dividend is a good sign, but it will only be meaningful if the yield increases, and we’re not there yet,” Peris said.
The technology company’s dividend payments are relatively small, with yields indicated for Meta and Alphabet below 0.5% and Apple’s a little higher. For comparison purposes, the yield on the S&P 500 index is 1.37%.
Still, dividends are partly intended to encourage long-term ownership, and the impact grows over time. Microsoft’s yield is around 0.7%, but that has increased. Over the past 20 years, stocks have risen about 1,500%. Including dividends, however, the recovery reaches 2,400%.
–With assistance from Tom Contiliano and Jeran Wittenstein.
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