For the most part, investors tend to consider “tech stocks” and “dividend stocks” as two separate categories. Tech companies are usually growth-oriented firms that use their excess cash flows to reinvest in their businesses. This is especially true in the current environment, where tech giants have opened their coffers to invest in artificial intelligence (AI) initiatives.
Typically, tech companies repurchase shares to return cash to shareholders. Even if they pay out a dividend, the outlay toward buybacks is much higher. For instance, in the September quarter, Apple (AAPL) repurchased $25 billion worth of its shares -- significantly higher than the $3.8 billion that the iPhone maker spent on paying dividends.
However, this year brought a ripple of dividends to mega-cap tech. Earlier in 2024, both Meta Platforms (META) and Alphabet (GOOG) initiated dividends, which means that Amazon (AMZN) and Tesla (TSLA) are now the only two “Magnificent 7” constituents that don’t pay dividends. Given Tesla’s focus on building AI products like Optimus, we can be reasonably sure that it won't initiate a dividend anytime soon. Moreover, it's a capital-intensive business and not a free cash flow powerhouse like other Magnificent 7 companies.
While Amazon might consider a dividend relatively soon given its healthy free cash flows, it is also busy investing in artificial intelligence.
So while investors may not get more dividends out of the Magnificent 7 anytime soon, Wolfe Research listed several companies that could consider paying dividends in 2025. Of these, Airbnb (ABNB) and PayPal (PYPL) stand out as two tech companies that could start paying up.
Should PayPal Start Paying a Dividend?
After closing in the red for three consecutive years, PYPL is up over 44% year-to-date in 2024 and is outperforming the S&P 500 Index ($SPX).
That said, PayPal’s growth – both on the top line and bottom line – has sagged, and the company’s revenues are expected to grow at mid-single-digit rates in both 2024 and 2025. Thanks to aggressive cost cuts, its earnings per share are expected to rise by double digits this year before cooling off again in 2025.
PayPal boasts negative net debt, and the cash and investments that it holds on its balance sheet are higher than the debt it owes. It also generates positive free cash flows regularly and expects $6 billion in FCF this year, all of which it intends to spend on share buybacks.
Taken together, PayPal is in a strong financial position where it can consider paying a dividend. The company’s growth has slowed down and its business has matured. In a previous article, I noted that share buybacks look like a better capital allocation strategy for PayPal given its tepid valuations. Now, with the stock up sharply from those lows, dividend initiation might be something that PayPal's management could consider over the next year.
Should Airbnb Start Paying a Dividend?
Airbnb generated free cash flows of $1.1 billion in Q3 which took its trailing 12-month free cash flow to $4.1 billion, representing a healthy free cash flow margin of 38%. Like PayPal, Airbnb is also using the bulk of its free cash flows on share buybacks. It repurchased $3.3 billion worth of its shares in the trailing 12-month period ending on Sept. 30.
However, unlike PayPal, Airbnb is still growing its top line at a brisk pace, although its revenue growth is much slower than in the past. In 2023, Airbnb’s revenues rose 18.1% year-over-year. This pales in comparison to the 77% sales growth it delivered in 2021.
Analysts expect Airbnb’s revenues to grow in the low-double-digit range in 2024 and 2025. In its Q3 shareholder letter, Airbnb said that it is “focused on accelerating growth while preparing for Airbnb’s next chapter, which will take us beyond accommodations” and listed international expansion as a growth driver.
However, I believe that given the capital-light business model and healthy free cash flows, Airbnb management might consider a dividend over the next few quarters.
