First Published on March 6th, 2023 by Bob Ciura for SureDividend
Over the past decade, many technology stocks such as Apple, Inc. (AAPL), Cisco Systems (CSCO), and more have initiated dividend payments to shareholders.
While the technology industry has widely embraced dividends, not all tech companies pay dividends. One lingering holdout to paying dividends to shareholders is e-commerce giant Amazon.com Inc. (AMZN).
Rather than return cash to shareholders, Amazon continues to plow its cash flow back into the business.
The decision whether or not a company should pay a dividend depends on many factors. Thousands of stocks pay dividends to shareholders, and an elite few have maintained long histories of raising their dividends every year.
For example, the Dividend Aristocrats are a group of 68 stocks in the S&P 500 that have raised their dividends for 25+ years in a row.
You can download an Excel spreadsheet of all 68 Dividend Aristocrats (with important financial metrics such as price-to-earnings ratios and dividend yields) by clicking the link below:
Amazon’s lack of a dividend certainly has not hurt investors to this point, as Amazon has been a premier tech stock.
Over the past 10 years, Amazon stock generated returns above 20% per year.
But for income investors, Amazon may not be an attractive option due to the lack of a dividend payment. This article will discuss the chances of Amazon ever paying a dividend.
Business Overview
Amazon is an online retailer that operates a massive e-commerce platform where consumers can buy virtually anything with their computers or smartphones.
Amazon is a mega-cap stock with a market cap above $900 billion. It operates through the following segments:
- •North America
- •International
- •Amazon Web Services
The North America and International segments include the global retail platform of consumer products through the company’s websites.
The Amazon Web Services segment sells subscriptions for cloud computing and storage services to consumers, start-ups, enterprises, government agencies, and academic institutions.
Amazon’s e-commerce operations fueled its massive revenue growth over the past decade. Sales reached $514 billion in 2022, an amazing level of growth over the past decade. Amazon reported impressive growth in 2022, as demand for e-commerce continued to rise.
The company expects continued growth in the first quarter of 2023.
Source: Investor Presentation
Of course, Amazon’s huge revenue growth did not come easy (or cheaply). Amazon had to spend huge amounts of money to build its retail operation. As a result, Amazon had razor-thin profit margins for many years of its growth phase.
Related: Which is the better investment, dividend stocks or growth stocks?
In the fourth quarter of 2022, revenue of $149.2 billion was up by 9% while adjusted earnings-per-share of $0.03 missed estimates by $0.14 per share. By segment, sales in North America increased 13%, while international sales increased 5% excluding foreign exchange. AWS sales increased 20% year-over-year.
For the first quarter, Amazon expects sales between $121 billion and $126 billion, which would represent growth of 4% to 8% from the first quarter of 2022.
While the retail business still operates at low gross margins, it continues to generate strong revenue growth. Separately, the AWS segment is highly profitable, and is largely 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.
That said, the company still plans to invest heavily in growth, which makes for uneven earnings-per-share from one quarter to the next.
Growth Prospects
As is typical with many technology companies, growth investment is Amazon’s top strategic priority. This is partly out of necessity. Things move extremely fast in technology, a highly competitive and cyclical industry. Technology firms need to invest large amounts to stay ahead of the pack.
Amazon is no different—it is making major investments to continue building its online retail platform. Amazon continues to grow its retail business. It also acquired natural and organic grocer Whole Foods for nearly $14 billion. This gave Amazon the brick-and-mortar footprint it desired to further expand its reach in groceries.
Amazon isn’t stopping there. In addition to the retail industry, it aims to spread its tentacles into other industries as well, including media and healthcare. Amazon has built a sizable media platform in which it distributes content to its Amazon Prime members.
Making original content is another highly capital-intensive endeavor, which will require huge sums in order for Amazon to compete with the likes of streaming giants Netflix (NFLX) and Hulu, as well as other television and movie studios.
Now that Amazon dominates retail and media content, it is readying a potential move into the healthcare industry. In 2018, Amazon acquired online pharmacy PillPack for $753 million.
More recently, in 2022 Amazon announced the acquisition of One Medical in a $3.9 billion all-cash transaction, including One Medical’s debt. One Medical is a national primary care company.
At the same time, Amazon continues to build its presence in robotics, particularly in household products. Amazon recently announced the $1.7 billion all-cash acquisition of iRobot (IRBT), which makes the Roomba and other products.
These investments will fuel Amazon’s revenue growth, which is what the company’s investors are primarily concerned with. Nevertheless, such aggressive spending will limit Amazon’s ability to pay dividends to shareholders, at least for some time.
In the 2023 first quarter, operating income is expected to be between $0 and $4 billion, compared with $3.7 billion in the first quarter of 2022.
Will Amazon Ever Pay A Dividend?
Amazon has joined the ranks of profitable tech companies like Apple and Cisco, which generate high earnings-per-share. In this way, Amazon has climbed ahead of other similar tech stocks like Netflix (NFLX), which still does not pay a dividend (and might never) due to a lack of consistent profits.
Amazon’s earnings-per-share were $(0.27) in 2022, a lackluster performance compared to $3.24 earned in 2021. Amazon still has a way to go before investors should realistically expect it to begin paying dividends.
In theory, Amazon could pay a dividend, as the company should be profitable in fiscal 2023. Amazon’s earnings-per-share are forecasted to be $1.51 for fiscal 2023.
The company can use its profits for a number of purposes, including debt repayment, reinvestment in future growth initiatives, paying dividends, or share buybacks.
If Amazon chose to, it could distribute a dividend to shareholders, although any announced dividend payout would likely be small, in terms of the dividend yield.
For example, even if Amazon maintained a dividend payout ratio of 25%, which would be appropriate for a growth-oriented tech company, the dividend of $0.38 per share would represent just a 0.4% yield.
Additionally, Amazon’s earnings and free cash flow are under pressure from rising costs, making it very unlikely Amazon will declare a dividend in the near term.
Final Thoughts
There is no debating the fact that Amazon has been one of the most impressive growth companies in history. From its humble beginnings as an online book seller, Amazon now dominates the online retail industry. It is also a massive cloud services provider, as well as a movie studio and content streaming giant.
Ultimately, a company has to make the decision to initiate a dividend payment. This is often done when future growth no longer requires such heavy investment. For Amazon, the company still has many new avenues for future expansion in mind, including (but not limited to) media content, grocery stores, and health care.
Growth is still very much the top priority for Amazon. As a result, investors should not expect a dividend payment any time soon.
This article was first published by Bob Ciura for Sure Dividend
Sure dividend helps individual investors build high-quality dividend growth portfolios for the long run. The goal is financial freedom through an investment portfolio that pays rising dividend income over time. To this end, Sure Dividend provides a great deal of free information.
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