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Already, Meta Platforms (META) and Alphabet (GOOG) – two of the "Magnificent 7" constituents – have initiated dividends in 2024. Chinese tech giant Alibaba (BABA) - the “Amazon of China” - also initiated a dividend in late 2023, after years of underperforming markets. Is it time for Amazon (AMZN) to follow that same lead and start paying a dividend to shareholders? In this article, we’ll examine whether or not the commerce giant should initiate a dividend.
To begin with, we should understand that companies can return excess cash to shareholders through dividends or share repurchases. While both types of payouts are discretionary and based on the management’s assessment of the macro environment and the company’s cash flows, dividends are much more stable than buybacks.
In 2020, multiple companies suspended their dividends amid the COVID-19 pandemic, but most have resumed them since. As for buybacks, companies can change the size and pace of these plans based on the prevailing stock price, as well as their cash needs. Apple (AAPL), for instance, recently announced a record $110 billion buyback – the largest in U.S. corporate history. The announcement came on the heels of its YTD underperformance versus other Big Tech companies.
Tech Companies Usually Prefer Buybacks Over Dividends
Usually, tech companies prefer share buybacks over dividends - and even if they pay a regular dividend, the yield tends to be paltry, at best. For instance, both Meta and Alphabet offer a dividend yield below 0.50%.
Even Microsoft (MSFT), which boasts the highest dividend yield among the Magnificent 7, has a yield of 0.73% - just over half of the S&P 500 Index’s ($SPX) yield.
Big Tech companies usually use their free cash flows to invest in the business or pursue acquisitions. While they generate massive free cash flows on a consolidated basis, parts of their business also burn cash – often a lot, actually. Whether it is Meta Platforms’ Reality Labs, which is building the metaverse, or Alphabet’s Other Bets segment, which includes its Waymo self-driving unit amongst others, tech companies tend to have some businesses that are draining their otherwise healthy cash flows.
The Case for Amazon Paying a Dividend
There are three main reasons why Amazon should consider a dividend. These include:
- Making the stock more appealing to investors: Some investors prefer companies that pay a dividend. Specifically, some funds are bound to invest in only dividend-paying companies. By initiating a dividend, Amazon could make its shares more appealing to this set of investors.
- Slowing growth: Amazon’s top-line growth has slowed, and sales are expected to grow at low double digits over the next couple of years. As the core business – which includes ecommerce and cloud - has stabilized, Amazon might consider a dividend.
- Cash flows: Amazon posted free cash flows of $36.8 billion in 2023, which is quite healthy. Management could use a part of these cash flows to start paying a regular dividend.
Before we look at the argument for Amazon not initiating a dividend, let’s dive into its capital allocation policy. As expected, questions around the “D” word popped up during Amazon’s Q1 earnings call, after both Meta and Alphabet initiated a dividend in 2024.
Responding to the question, Amazon’s CFO Brian Olsavsky said that its first capital allocation priority is to invest in the business to support its long-term growth – a boilerplate answer one might get from all Big Tech companies. Specifically, he pointed out that the company has opportunities in areas like generative AI (artificial intelligence) that can generate “meaningful returns.”
To be sure, names like Microsoft, Alphabet, Tesla (TSLA), and Meta Platforms have also scaled up their capex and are specifically investing in expanding their AI capabilities.
Olsavsky also pointed out that Amazon intends to use its free cash flows to repay some of the debt that the company accumulated between 2021 and 2022, when it posted negative free cash flows.
Why Amazon Shouldn’t Pay a Dividend – At Least, For Now
I believe Amazon shouldn’t start paying a dividend yet. The company’s business is much more cash-guzzling than its Big Tech peers like Apple, Alphabet, and Microsoft. Specifically, its ecommerce operations require massive investments in building physical infrastructure. Also, the company continues to expand globally, which might need continued investments. The same would hold true for Tesla, which remains a capital-intensive business, even as it becomes a legit AI play.
Amazon’s free cash flows are not as linear as most other Big Tech companies, and the last thing it would have wanted in 2021 and 2022 (when it posted negative free cash flows) was to pay a regular dividend to investors.
From a balance sheet perspective, it is the only Magnificent 7 constituent with positive net debt - which means it has more debt than cash on its balance sheet. All others, including Tesla, have a negative net debt and hold more cash than the debt they owe.
Amazon's operating margins are quite volatile (as well as low) compared to most other Big Tech peers. Its business is also quite susceptible to economic slowdowns, and the ecommerce segment especially tends to fare quite badly in periods of recession.
Given the above arguments, I don’t foresee Amazon paying a dividend for at least the next couple of years - and for very valid reasons. That said, if you are seeking an AI stock that also pays a healthy dividend, HP (HPQ) just might fit the bill.
On the date of publication, Mohit Oberoi had a position in: AMZN , AAPL , MSFT , TSLA , META , BABA . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
