Investors raked in record dividend payments last year, and more of Big Tech is joining the party. After helping drag the market to record highs, mega caps like Meta and Alphabet have joined fellow tech giants Apple, Microsoft and Nvidia in returning cash to shareholders. While dividends may be more commonly associated with traditional value stocks, rather than market darlings helping drive the A.I. boom, analysts said the move opens these stocks to new categories of investors—and utilizes cash that has few places to go.
Facebook-parent Meta introduced a 50-cent dividend in February, which helped fuel a historic rally for the stock. Three months later, Alphabet followed suit with a dividend of 20 cents per share, sparking a 10% gain in the Google-parent’s shares.
In doing so, the companies finally joined the likes of Microsoft, which first declared a dividend in 2003, and Apple, which reinstated its quarterly dividend in 2012 after suspending it for 17 years. In the first quarter of 2024, the latter two companies were the third- and eighth-biggest dividend payers in the world, according to the Janus Henderson Global Dividend Index.
Companies in growth-mode are typically focused on reinvesting in the business, not redistributing earnings back to shareholders, but CFRA Research’s Angelo Zino and Baird’s Ted Mortonson both said these dividend payments don’t represent a threat to future dominance.
“I don’t view it as a problem,” Mortonson said. “I view it as they’ve won. They’ve won the technology side. They've won on the business-model side, and they're going to win on the Gen AI cycle.”
Massive cash flows and few acquisition options make Big Tech dividends natural move
The "Magnificent Seven," a movie-inspired moniker that refers to Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla, accounted for half of the S&P 500’s total gains last year, according to a report from Morgan Stanley. Amazon and Tesla—the latter an outlier in the group due to its much weaker profitability—are the only two members that do not pay a dividend.
In May, Nvidia increased its dividend by 150%, from $0.04 to $0.10, but only to make way for a 10-for-1 stock split that resulted in a quarterly payout of just $0.01. It's worth remembering the dividend yields for Big Tech remain quite low relative to the rest of the market. The average yield for a dividend-paying stock in the S&P 500 is about 2.3%, according to Barron’s. That’s well above the likes of Microsoft (0.73%), Apple (0.55%), Alphabet (0.47%) and Meta (0.42%), per Morningstar.
Zino noted these companies' payouts represent a marginal portion of their free cash flows, which together exceed $200 billion as of last quarter. With a collective cash balance of over $400 billion, including a whopping $162 billion at Apple, there's only so many ways for the tech giants to deploy it.
One option is massive share buybacks. Meta's and Alphabet’s dividend announcements came with $50 billion and $70 billion repurchase authorizations, respectively. Apple set the record for the largest buyback in U.S. history by repurchasing $110 billion of shares in May, topping the $100 billion mark it previously set in 2018.
Potential acquisitions, however, appear to be drying up as Big Tech draws antitrust scrutiny. Widely expected regulatory hurdles, for example, might have scuttled talks over Google’s $23 billion bid for cybersecurity startup Wiz last week.
So, despite hefty investments in AI, there’s plenty to reinvest and then some.
“They better pay a dividend,” Mortonson said of the tech giants, “because they’re going to be free cash flowing better than some countries.”
Both Mortonson and Zino noted paying dividends makes these Big Tech stocks eligible for inclusion in income and dividend funds, expanding their investor pools dramatically. The recent sell-off of tech stocks, meanwhile, could also make these companies more appealing to value-focused investors.
“We see potential for them to significantly hike those dividends here over the next three years or so,” Zino said.
For investors seeking both eye-watering growth and consistent returns, it just might be a win-win.
