Updated May 3, 2021 by Bob Ciura
Over the past decade, many technology companies such as Apple, Inc. (AAPL), Cisco Systems (CSCO), and others have initiated dividend payments to shareholders. There are now over 300 dividend-paying technology stocks, making the tech sector a surprisingly good source for dividend payers.
While the tech industry has largely accepted dividends, not all tech companies pay dividends. One persistent barrier to paying dividends to shareholders is e-commerce giant Amazon.com Inc. (AMZN). Instead of giving cash back to shareholders, Amazon continues to plow its cash flow back into the business.
Deciding whether or not a company should pay a dividend depends on many factors. Thousands of stocks pay dividends to shareholders, and a few have a long history of increasing their dividends each year.
For example, the Dividend Aristocrats are a group of 65 stocks in the S&P 500 that have raised their dividends for more than 25 consecutive years.
You can download an Excel spreadsheet of all 65 Dividend Aristocrats (with key financial metrics like price / earnings ratios and dividend yields) by clicking the link below:
The lack of a dividend on Amazon certainly hasn’t hurt investors so far, as Amazon has been a leading growth stock. For the past 10 years, Amazon stock has returned approximately 33% per year.
However, for high-income investors, Amazon may not be an attractive option as there is no dividend payment. This article explains the chances that Amazon will ever pay a dividend.
Amazon is an online retailer that operates a huge e-commerce platform where consumers can buy virtually anything with their computers or smartphones. Amazon is a mega-cap stock with a market capitalization of over $ 1.6 trillion.
It works in the following segments:
- North America
- Amazon Web Services
The North America and International segments comprise the global retail platform for consumer goods through the company’s websites. The Amazon Web Services segment sells subscriptions to cloud computing and storage services to consumers, startups, businesses, government agencies, and academic institutions.
Amazon’s e-commerce business has fueled massive sales growth over the past decade. Note that Amazon had 2008 sales of $ 14.84 billion. Sales reached $ 386 billion in 2020, a staggering growth over the past decade.
Amazon continued to see impressive growth in 2021 as the demand for e-commerce only continues to grow.
Source: Investor Presentation
Of course, Amazon’s tremendous sales growth hasn’t been easy (or cheap). Amazon had to spend huge sums of money to build its retail business. As a result, Amazon had wafer-thin profit margins for many years of its growth phase. Even so, the company has been profitable every year for the past decade, with the exception of 2014.
In the first quarter of 2021, Amazon’s revenue grew 44% to $ 108.5 billion. Earnings per share of $ 15.79 more than tripled from $ 5.01 per share for the prior-year quarter.
While the retail business continues to operate with low gross margins, it continues to generate strong sales growth. Regardless, the AWS segment is highly profitable and is primarily the reason for Amazon’s impressive earnings growth. Such strong earnings growth improves Amazon’s chances of paying a dividend at some point in the future. However, the company continues to plan to invest heavily in growth.
As is common with many tech companies, investing in growth is a top strategic priority at Amazon. This is in part out of necessity. In technology, a highly competitive and cyclical industry, things happen extremely quickly. Tech companies must invest large sums to stay ahead.
Amazon is no different – it is making huge investments to keep growing its online retail platform. Amazon continues to expand its retail business. The company also acquired Whole Foods for nearly $ 14 billion. This gave Amazon the stationary footprint it wanted to continue expanding its reach in groceries.
Amazon doesn’t stop there. In addition to retailing, the company is set to expand its tentacles to other industries, including media and healthcare. Amazon has built an extensive media platform on which content is distributed to its Amazon Prime members.
Creating original content is another extremely capital-intensive endeavor that will require huge sums of money to allow Amazon to compete with streaming giants Netflix (NFLX) and Hulu, as well as other television and film studios.
Now that Amazon is dominating retail and media content, it is preparing a possible entry into the healthcare industry. In 2018, Amazon acquired the online pharmacy PillPack for $ 753 million, likely a forerunner to a bigger leap into healthcare.
These investments will fuel Amazon’s revenue growth, which the company’s investors are primarily concerned with. Even so, such aggressive spending will limit Amazon’s ability to pay dividends to shareholders for at least some time.
Will Amazon Ever Pay a Dividend?
Amazon is among those profitable tech companies like Apple and Cisco that have high earnings per share. In this way, Amazon has pioneered other similar technology stocks like Netflix (NFLX), which still (and may never) pay dividends due to a lack of consistent earnings.
Amazon’s earnings per share were $ 41.83 in 2020, meaning the company has reached new levels of profitability. However, Amazon has a long way to go before anyone can realistically expect it to start paying dividends.
In theory, Amazon could pay a dividend if it so chose. Amazon is free cash flow positive, which means it generates free cash flow that can be used to pay dividends. For the last four quarters of the report, Amazon posted free cash flow of $ 26.4 billion, up 9% over the previous twelve month period.
Source: Investor Presentation
The company could use its free cash flow for a number of purposes, including paying off debt, reinvesting in future growth initiatives, paying dividends, or simply building cash on its balance sheet. If Amazon so chooses, it could pay a dividend to shareholders, though any announced dividend payout would likely be small in terms of dividend yield.
Amazon ended the first quarter of 2021 with 519 million shares outstanding, including share-based awards. If the company announced a modest dividend payout ratio of 25% of lagging earnings per share, it would mean a dividend payout of $ 10.45 per share based on 2020 earnings per share. That payout ratio would result in a dividend yield of just 0.3% surrender.
The very low dividend yield is the result of Amazon’s sky-high share price, which is currently above $ 3,300. A dividend yield of 0.3% would be practically meaningless for high-income investors. The company could cash out a larger percentage of its profits for a higher return. However, doing so would affect its ability to invest in growth, which is vital for tech companies like Amazon.
There’s no denying that Amazon was one of the most impressive growth companies in history. From its humble beginnings as an online bookseller, Amazon has now dominated online retail. It’s also a massive cloud service provider, as well as a film studio and content streaming giant.
Ultimately, a company must make the decision to initiate a dividend payment. This often happens when future growth no longer requires such high investments. For Amazon, the company still has many new opportunities for future expansion in mind, including (but not limited to) media content, grocery stores, and healthcare.
As a result, growth remains a top priority for Amazon. As a result, despite Amazon’s growing sales and profitability, investors shouldn’t expect a dividend payment anytime soon.
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