3 tech giants who should consider paying dividends
The growth of the tech industry has made some tech stocks some of the most valued companies in the world. And growing to this size has given many of these tech pillars enough stable cash flow to finally stop resisting the idea of ââpaying dividends.
Today, technology dividend-paying stocks like Broadcom and Cisco Systems offer distribution yields that far exceed the 1.3% average dividend yield of the S&P 500. While Apple and Microsoft do not match this level, their dividends offer a cash yield of 0.6% and 0.8%, respectively.
These companies contrast with tech giants such as Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG), Amazon (NASDAQ: AMZN), and Facebook (NASDAQ: FB), who have consistently refused to offer dividends despite an apparent ability to afford payments. Let’s find out a bit more about these tech companies and their dividend situation.
Alphabet and its Google brand have become one of the most recognized companies. Its search engine, YouTube platform, Android operating system and numerous apps have made it one of the largest companies in the world.
As a result, its market capitalization now exceeds $ 1.8 trillion. It has reached this size in part because of its ability to generate cash flow. In the previous two quarters alone, it generated just under $ 30 billion in free cash flow. In addition, its liquidity position stands at nearly $ 137 billion.
Considering its cash position alone, one would think Alphabet could afford payments. To match the 1.3% average dividend, the company would need to pay shareholders about $ 35 per share per year. Considering its 667 million shares outstanding, that would cost the company around $ 23.3 billion. While this appears to be a significant sum, it represents 55% of Alphabet’s free cash flow in 2020 and is expected to be less than 40% of free cash flow in 2021. Therefore, offering such a payment should still allow Alphabet to do what it does best – invest in innovation.
Like Alphabet, Amazon has become one of the biggest tech giants. Over time, pioneering initiatives in the e-commerce and cloud computing sectors have helped bring Amazon stocks to a market cap of just above $ 1.7 trillion. . Additionally, Amazon’s liquidity position now stands at $ 89.9 billion, up more than $ 5 billion since December.
Despite this, free cash flow has seen a massive decline recently. In the second quarter of 2021, Amazon reported free cash flow of $ 12.1 billion for the last 12 months, compared to $ 31.9 billion for the last 12 months ending in the second quarter of 2020.
Although management did not discuss free cash flow during the second quarter 2021 earnings call, Amazon said it was increasing its sales force and expanding its infrastructure into new markets. As a result, purchases of property, plant and equipment increased by 144% during this period, which significantly reduced levels of free cash flow.
Certainly, such expenses could affect the size of potential payments. A cash yield of 1.3% would mean Amazon pays a dividend of around $ 44 per share per year. With around 504 million shares outstanding, that payment would cost Amazon around $ 22.2 billion annually. Given that this exceeds or claims the overwhelming majority of free cash flow in each of the past three years, Amazon would likely not match the average return of the S&P 500.
Still, to equalize Apple’s dividend yield of 0.6% would cost Amazon around $ 10.2 billion. Despite the costs of improving infrastructure, Amazon could likely afford such a figure, even in a lower free cash flow environment.
Like its big tech peers, Facebook’s widespread appeal and success as an advertising platform has resulted in both user growth and massive profits. This success has now increased its market capitalization to $ 1 trillion.
It also took its cash flow to new heights. In the first two quarters of 2021, Facebook generated more than $ 16.3 billion in free cash flow, an increase of 108% over the first six months of fiscal 2020. In addition, it holds nearly $ 64 billion in cash and marketable securities.
At current prices, he is expected to pay shareholders about $ 4.60 per share per year to match the average. Such a payment would demand $ 12.9 billion in cash from Facebook, given its 2.8 billion shares outstanding. Additionally, if free cash flow generation remains at its current rate, this amounts to around 40% of 2021 free cash flow. Compared to 2020 free cash flow of $ 23 billion, it would claim around 56 billion dollars. % of free cash flow. Such ratios seem to make a payment of 1.3% affordable.
Takeaway for investors
Of course, each of these companies has enjoyed massive success without resorting to dividends. Nonetheless, without a dividend, these companies are unlikely to be on the radar of income-driven investors.
Additionally, a closer look at the financial data of these companies indicates that each of them could afford to become dividend-paying stocks on par with other tech giants. Since dividends give shareholders an additional incentive to hold onto a stock regardless of market conditions, any company can view the payments as a way to expand and further consolidate their shareholder base.
This article represents the opinion of the author, who may disagree with the âofficialâ recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.