Alphabet, Facebook, and Adobe don’t do it yet, but that could change sooner than you think.
Many investors, young and old, love their dividends. And in the age of low-interest rates, many older investors are no doubt turning to dividend stocks for both income and growth.
One area in which these investors may have a difficult time investing is the tech space. In the tech industry companies can be reluctant to commit to a dividend payment because the industry often requires having the capital available to adapt to the latest technological advancement or trends quickly, while also facing a constant threat of disruption. Steve Jobs had a no-dividend-ever policy while he was running Apple, but after Apple’s cash ballooned to over $100 billion after his death, the company began paying a dividend in 2012.
Unfortunately for yield-only investors, much of the broader market gains over the last few years have come from these cash-hoarding tech companies. Over the last three years, the NASDAQ has shot up 73%, compared with the S&P’s 38%. In addition, the prospect of reduced repatriation taxes in the new tax bill means these companies may have more options for their cash than they know what to do with. In that case, here are some A-list tech stocks that could follow Apple’s lead and start paying a dividend in the next few years.
Alphabet
Alphabet Inc.’s Google absolutely dominates the online search industry, leading to a whopping 42.4% market share of the U.S. digital advertising market, according to eMarketer. Moreover, the digital advertising industry is growing 16% per year, so there is still room for this leader to grow. In addition to search, Google continues to roll out more video offerings like YouTube Red and skinny over-the-top bundle YouTube TV, along with a push into more premium video content. Google’s dominance of the digital advertising space has fueled a massive growth in earnings from roughly $11 billion five years ago to $21 billion today.
Of course, Alphabet also has its “Other Bets” segment, where it aims to use its artificial intelligence chops to incubate new business lines. Several of these bets, especially Google Cloud and self-driving car unit Waymo, may become cash generators sooner than you might think.
Add all of that to an enormous $100 billion cash position, and there you have a recipe for some sort of capital return program for shareholders. While buybacks may make sense for Alphabet, its P/E ratio is still rather high at 37 times earnings, which may make share repurchases less attractive, so a cash return could very well take the form of dividends in the years ahead.
The aforementioned digital advertising space is becoming more and more of a duopoly (at least outside of China), with Google’s “Coke,” competing with Facebook’s “Pepsi.” With its core Facebook, Instagram, and WhatsApp brands, Facebook has a huge 21% market share in U.S. digital advertising and is forecast to grow that share in the years ahead.
Facebook has posted astounding earnings growth, from only about $1 billion at the time of its IPO to more than $15 billion over the past year. The company has one of the very best returns per employee, leading to robust operating margins of almost 50% and a $38 billion-plus cash hoard.
Facebook doesn’t have as many capital-intensive “Other Bets” as Alphabet does, and, given a similarly high P/E ratio of 37, it’s not crazy to envision a Facebook dividend coming down the pike.
Adobe
One of the best-performing stocks over the past few years has been Adobe. Its transition to a cloud-based, software-as-a-service model and prime execution has made its Creative Cloud Suite a must-have for visual artists of all types. Since the company exited that cloud transition in 2014, its earnings per share have more than quadrupled.
That stunning turn of events has also resulted in a strong $4 billion net cash position and a sky-high P/E ratio of 55. In that light, it’s always possible Adobe could start devoting some of its shareholder return program — which currently comprises repurchases — toward dividends.
So for income-oriented investors looking to add some growth and tech names to their portfolios, Alphabet, Facebook, and Adobe — each of which could begin paying dividends in the years ahead — may fit the bill.
