Dividends go digital

  • Amazon and Tesla are now the only non-dividend paying members of the magnificent 7
  • Meta shares currently yield 0.46%, while Alphabet yields 0.47% – both well below the 1.35% overall yield of the S&P 500
  • Mark Zuckerberg, CEO of Meta owns c.13.5% of the business and is expected to receive $700m a year in dividends moving forward

Following Meta’s lead back in February, last week Alphabet (Google’s parent company) announced that they too would start to pay a dividend. Though the actual dividend yield is not overwhelming, and unlikely to grow for the short term – the announcement was welcomed by markets and saw the respective market capitalisations surge more than $300bn.

In the case of Alphabet, the dividend was introduced alongside better-than-expected earnings ($80.54bn for the first quarter of 2024), helped by an increased demand for their cloud-based solutions as adoption of generative AI ticks up and a 13% increase in advertising sales. On the same day, a $70bn share buyback plan was announced which is an identical size to last years programme. Share buybacks are where businesses purchase their own shares, either in the secondary market or by offer to existing shareholders – ultimately reducing share capital and driving up price.

What do dividends usually signal?

Back in 2003 when Microsoft started paying a dividend, it was viewed as a signal for the end of its rapid growth era. Typically, only more mature businesses are able to pay a dividend as those in the earlier stages need to re-invest all available cash flows to generate future growth.

In terms of returning cash to shareholders, US firms have historically preferred the more flexible route via share buybacks, and dividends were reserved for more mature businesses. However, this traditional ideology can now be challenged, since technology businesses can demonstrate rapid earnings growth and considerable investment to generate future returns, while maintaining a visible show of financial strength and longevity in commitment to shareholders by way of paying dividends.

Source: LSEG

Though the payment of a dividend could increase shareholder base – ultimately, corporate profits are usually a larger factor for share price growth. Just yesterday, Apple’s share price surged 6%, reaching a market cap of $2.67tn in after-hours trading as quarterly revenue came in at $90.8bn, ahead of expectations ($90.0bn). However, this was still a 4% decrease from the previous year. Apple also announced a $110bn buyback scheme, the largest in the company’s history.

Dividend paying technology businesses

Alphabet and Meta have joined some great company and perhaps a surprising number of big tech already pay dividends – in some cases for over 20 years. Those businesses and their annual dividend yield’s include:

  1. Apple: 0.6%
  2. Hewlett Packard: 2.9%
  3. Oracle Corp: 1.3%
  4. Microsoft: 0.76%
  5. IBM: 4%
  6. Cisco: 3.42%

Bowmore portfolios

The US, and the technology sector in particular (which accounts for c.25% of its index), continue to provide competitive returns – and this is a theme that we believe will continue for some time to come. Our pure equity exposure to technology is via a passive index, namely the L&G Global Technology Index which has benefited from recent momentum, returning some 39.6% in the last 12 months. The fund’s largest holdings are Microsoft, Apple, Nvidia, Meta and Alphabet and so the recent dividend and buyback announcements have been of benefit to portfolios.

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