InvestorPlace – Stock Market News, Stock Advice & trading Tips
Meta Platforms (NASDAQ:META) took Wall Street by surprise with the recent revelation of their inaugural quarterly dividend plan. The parent company of Facebook, Instagram, and WhatsApp disclosed that the payout would amount to 50 cents per share, equating to $2 annually. At current prices, it translates to a modest yield of about 0.4%, offering considerable room for expansion.
Cast your memory back to the 1990s, and recall the scarcity of tech stocks that paid dividends. They were chiefly focused on funding their growth and opted to channel their surplus cash back into the business. Fast forward thirty years, and these entities now represent more mature businesses, a time when numerous tech companies reward shareholders: Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), and Cisco (NASDAQ:CSCO), are among those who remunerate their stockholders for their ownership.
The prevailing norm is that most tech companies still refrain from paying dividends, but conceivably, many have the wherewithal to do so. Here are three technology entities that are prime candidates to emulate Meta’s undertaking. However, the question remains – will they?
Alphabet (GOOG, GOOGL)
Source: turbaliska / Shutterstock.com
Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) promptly comes to mind as one of the pioneering tech stocks that could potentially compensate shareholders with a dividend. The company wrapped up 2023 with over $110 billion in cash, equivalents, and short-term investments on its books. The internet search giant also amassed nearly $70 billion in free cash flow (FCF). While Alphabet undoubtedly possesses the fiscal capability to introduce a payout, it seems remote at present.
Presently, Alphabet opts to allocate a substantial portion of its surplus cash to share buybacks. In the preceding year alone, it expended $61.5 billion on repurchasing shares, which equates to 88% of its FCF. For many corporations, the belief is that repurchasing stock represents a more tax-efficient manner of returning value to shareholders than distributing dividends.
Despite President Biden’s 1% tax imposition on stock repurchases, a figure that surged to 4%, businesses have exhibited no reticence in continuing to engage in buybacks. Nonetheless, shareholders generally favor dividends as they tangibly signify a company’s prosperity. It represents cash that investors can elect to reinvest in the business themselves. All in all, Alphabet appears unlikely to veer from its current course anytime soon.
Amazon (AMZN)
Source: Tada Images / Shutterstock.com
Likewise, Amazon (NASDAQ:AMZN) is not inclined to commence remunerating shareholders for holding its stock. Analogous to Alphabet, the e-commerce colossus stands in a position to afford a dividend, boasting $87 billion in liquid assets and generating $32 billion in FCF last year. Yet, in contrast to Alphabet, Amazon refrained from buying back its stock, instead choosing to reinvest in the business.
Companies can only allocate their cash profits in a few ways: issue dividends, repurchase shares, pay off debts, partake in mergers and acquisitions, or reinvest in the business. Amazon has opted for the latter, using virtually all of its profits across its diverse businesses.
Amazon transcends e-commerce; it doubles as a cloud services company through Amazon Web Services and operates physical retail stores, third-party marketplaces, digital advertising, streaming video, and more. By plowing its cash profits into each of these domains, the firm aspires to elevate them into dominant forces, a feat it has achieved in numerous instances.
Unquestionably, Amazon has encountered notable failures, such as with its Fire Phone and Amazon Wallet. Notwithstanding, the crux of the matter is that Amazon is ceaselessly striving to expand and grow. Therefore, it appears improbable that the company will ever consider adopting a dividend model.
Salesforce (CRM)
Source: IgorGolovniov / Shutterstock.com
At first glance, customer relationship management specialist Salesforce (NYSE:CRM) may not wield the same financial prowess as Alphabet or Amazon. It currently holds $12.5 billion in cash, equivalents, and short-term investments. Nonetheless, it experienced a 19% surge in FCF last year, amassing $6.3 billion in 2023.
While Salesforce maintains sustainable financial capacity to issue dividends, it has resolved to leverage an alternate approach in utilizing its FCF: engaging in acquisitions. Salesforce could be characterized as a consistent acquirer, having executed substantial acquisitions in recent years. Specifically, Slack was procured for $27.7 billion in 2021, followed by Tableau for $15.7 billion in 2019, and MuleSoft, which was acquired for $6.5 billion the year prior. Salesforce anticipates consummating several more acquisitions in the foreseeable future.
Given that mergers and acquisitions are an intrinsic component of Salesforce’s DNA and absorb the lion’s share of its cash profits, meager remains for dividends. It ensconces Salesforce as another tech entity that could seemingly and arguably prioritize dividends over extant paths. Nevertheless, it appears improbable that Salesforce will chart this course, and investors would be remiss to pin their hopes on such an outcome.
On the date of publication, Rich Duprey had neither direct nor indirect holdings in any of the securities referenced in this article. The views expressed by the author are in line with the InvestorPlace.com Publishing Guidelines.
Rich Duprey has been reporting on stocks and investment for the past two decades. His articles have been featured on Nasdaq.com, The Motley Fool, and Yahoo! Finance, and he has been cited by various U.S. and international publications, encompassing MarketWatch, Financial Times, Forbes, Fast Company, USA Today, Milwaukee Journal Sentinel, Cheddar News, The Boston Globe, L’Express, as well as an array of other news outlets.
More From InvestorPlace
The post Follow META’s Lead? 3 Tech Stocks That Should Also Debut Dividends appeared first on InvestorPlace.
The perspectives and opinions conveyed in this material are personal to the writer and do not necessarily reflect those of Nasdaq, Inc.
