Meta Platforms (NASDAQ:META) jolted investors with the revelation of its inaugural quarterly dividend. The social media titan, owner of Facebook, Instagram, and WhatsApp, unveiled a plan to distribute 50 cents per share, translating to $2 annually and yielding approximately 0.4% at current stock prices.
The Evolution of Tech Dividends
Back in the 1990s, few tech companies distributed dividends. They plowed their profits into expansion and development. Over subsequent decades, these entities matured, prompting many to adopt a dividend model. Tech giants such as Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), and Cisco (NASDAQ:CSCO) now reward shareholders.
Potential Dividend Initiators
Despite this trend, many tech firms have held back. However, certain companies could afford to introduce dividends. Here are three likely candidates, although whether they actually will is a different story.
Alphabet (GOOG, GOOGL)
Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) stands out as a prime contender to commence dividend payments. By the close of 2023, the internet behemoth boasted cash, equivalents, and short-term investments totaling over $110 billion and generated nearly $70 billion in free cash flow (FCF). Despite this, Alphabet remains committed to utilizing a substantial portion of its surplus cash for share repurchases, having spent $61.5 billion on buybacks in the previous year – a sum equivalent to 88% of its FCF.
While President Biden’s attempt to elevate taxes on stock buybacks has not deterred companies, many investors favor dividends as they symbolize a company’s prosperity. Nonetheless, Alphabet appears disinclined to offer one anytime soon, using share buybacks as an alternative, tax-efficient route to provide value to shareholders.
Amazon (AMZN)
Akin to Alphabet, Amazon (NASDAQ:AMZN) has the financial capacity to implement a dividend, with $87 billion in liquid assets and $32 billion in FCF in the preceding year. Unlike Alphabet, Amazon abstains from stock buybacks, choosing to reinvest profits across its diverse business segments. The e-commerce juggernaut invests extensively in areas such as cloud services, physical retail, and digital advertising, aiming to bolster its presence in these domains.
As the leading force in online sales and cloud services, Amazon places a premium on expansion, which entails eschewing dividend payouts to further its growth strategy.
Salesforce (CRM)
Salesforce’s Strategic Shift Away from Dividends Towards Acquisitions
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On the surface customer relationship management specialist Salesforce (NYSE:CRM) does not have quite the same financial resources as either Alphabet or Amazon. It only has $12.5 billion in cash, equivalents, and short-term investments available to it. However, it did see a 19% increase over the past year of FCF, generating $6.3 billion in 2023.
Although Salesforce could sustainably afford to pay a dividend, it instead chooses one of the other routes open to it for using its FCF: making acquisitions. Salesforce could be considered a serial acquirer, with significant acquisitions in the past few years. Notably, Slack was acquired for $27.7 billion in 2021, Tableau for $15.7 billion in 2019 and MuleSoft was bought the year before for $6.5 billion. Salesforce anticipates making many more acquisitions in the future.
Because M&A activity is part and parcel of Salesforce’s DNA and it uses up the bulk of its cash profits, little remains for dividends. The CRM specialist becomes another in a long list of tech stocks that could, and maybe should prioritize a dividend over the paths they’ve chosen. However, Salesforce seems unlikely to take that path, and investors shouldn’t hold their breath waiting.
On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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