(Bloomberg) — After years of chasing growth at all costs, tech firms are taking a page from the playbook of old-school value businesses — paying a dividend. Throwing off more cash than they can spend, the shift to a regular payout provides more evidence for the companies’ financial strength.
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Various technology firms have introduced quarterly payouts this year, and while the yields are small, the news sparked huge rallies as investors took the initiations as a sign the group can continue to deliver robust cash flows.
Alphabet Inc. last month announced a dividend of 20 cents a share, sparking a 10% gain in the shares of the Google parent. Meta Platforms Inc. in February introduced a 50-cent dividend, which contributed to a historic pop in the stock. Salesforce Inc. and Booking Holdings Inc. also launched dividends this year.
“Dividends will be table-stakes for big tech going forward,” said Mark Iong, an equity fund manager at Homestead Advisers. “I think if you don’t pay one, it will now be taken as a sign 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 expect will continue to support share price gains.
“What’s exciting is they are doing dividends and buybacks simultaneously, while also cutting costs and growing, which is them stepping on the pedal for profits across the board,” Iong said.
Among the so-called Magnificent Seven, only Amazon.com Inc. and Tesla Inc. don’t pay a dividend. “It will be difficult for Amazon to not 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 repaying debt, as opposed to shareholder returns. Tesla on its website said it doesn’t anticipate paying any cash dividends for the foreseeable future.
Nvidia Corp.’s 4 cent per share quarterly dividend represents a yield of 0.02% and hasn’t been raised 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 stock buybacks. Cash from operations is expected to more than double to $58 billion in the current year, according to average analyst estimates compiled by Bloomberg.
Shares of Facebook’s parent company are up about 35% this year, while Alphabet is up 21%. Both have outperformed the 7.9% gain in the Nasdaq 100 Index.
High cash flow and solid balance sheets are a core reason why megacap technology stocks are well liked on Wall Street. The six biggest megacaps are projected to generate more than $416 billion in combined free cash flow this year.
Buybacks Remain in Favor
Still, repurchasing stock — which supports earnings per share by reducing share count — remains the favored way for these companies to return money to shareholders. The Magnificent Seven have spent almost $58.5 billion on buybacks this year, while allocating less than $11 billion on dividends, according to data compiled by Bloomberg.
Meta’s dividend came with a $50 billion buyback, while Alphabet’s was paired with a $70 billion repurchase authorization. Apple Inc. — which started paying a dividend more than a decade ago — last week announced the largest buyback in US history: $110 billion, exceeding the previous record of $100 billion it set in 2018.
“These companies are still in the thrall of buybacks, and the dividend yields aren’t significant, but I think it is very telling that these companies are moving in this direction,” said Daniel Peris, a 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 is only meaningful if the yield adds up, and we’re not there yet,” Peris said.
The tech firm’s dividend payouts are relatively small, with the indicated yields for both Meta and Alphabet below 0.5% and Apple’s barely higher. To compare, the yield of the S&P 500 Index is 1.37%.
Still, dividends are partially meant to encourage long-term ownership, and the impact compounds over time. Microsoft’s yield is around 0.7%, but that has added up. Over the past 20 years, shares have climbed about 1,500%. Including dividends, however, the rally tops 2,400%.
–With assistance from Tom Contiliano and Jeran Wittenstein.
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