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2 Tech Giants That Should (But Don't) Pay Dividends

By Ashraf Eassa - Sep 29, 2018 at 1:00PM

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Facebook and Alphabet generate a lot of cash and should probably share some of it with their stockholders.

Many large and successful technology companies pay significant (and often growing) dividends to their stockholders. Examples include Apple (AAPL -2.98%), the world's most valuable technology company by market capitalization, which currently distributes $0.73 per quarter ($2.92 annualized) in dividends. And Microsoft (MSFT -3.17%), another highly profitable tech giant, just raised its quarterly dividend to $0.46 per share ($1.84 annualized).

Two very large and highly successful companies that could -- and, frankly, should -- join companies like Apple and Microsoft in paying generous dividends to shareholders are social media leader Facebook (META -5.20%) and search giant Alphabet (GOOGL -3.30%) (GOOGL -3.30%). Here's why:

The case for a Facebook dividend

Facebook stock has delivered substantial returns to its shareholders by way of capital appreciation. The company's revenue and free cash flow have surged over the years, fueling the rise in the company's share price.

FB Revenue (TTM) Chart

FB revenue data by YCharts. TTM = trailing 12 months.

While Facebook is still expected to deliver solid growth in the years ahead, that growth is clearly slowing and is set to continue to do so in the years ahead. Analysts' consensus calls for Facebook's revenue growth to be around 25% in 2019, and 22% in 2020 -- a far cry from the 36.9% revenue growth expected in 2018 or the 47.1% that it saw in 2017.

Moreover, on its most recent earnings call, CFO David Wehner told investors that "over the next several years, we would anticipate that our operating margins will trend toward the mid-30s on a percentage basis." Indeed, Wehner said that Facebook expects that its "full-year 2018 total expenses will grow in the range of 50% to 60% compared to last year" and that "total expense growth will exceed revenue growth in 2019."

The front sign at Facebook headquarters.

Image source: Facebook.

So, while Facebook's sales are still set to grow, and while analysts still think the company will continue to deliver profit growth, that growth looks like it'll be slower in the years ahead. As revenue and profit growth slows, Facebook shares could be less likely to deliver the robust price appreciation that they have in the past. Giving back some of its massive free cash flow in the form of a dividend and committing to grow that dividend over time seem like good ways to entice current shareholders to stick around while also attracting more income-oriented investors to the stock.

Alphabet, too

Alphabet is another large, highly profitable, and growing technology company that doesn't pay a dividend. In fact, Alphabet is even larger than Facebook, commanding a market capitalization of nearly $830 billion as this is being written, and generating even more in free cash flow than Facebook.

GOOGL Revenue (TTM) Chart

GOOGL revenue data by YCharts.

Alphabet generates a lot of revenue and profit, and analyst estimates suggest that those figures will rise nicely over the next few years. Putting some numbers to it, analysts expect Alphabet to rake in about $137.1 billion in revenue in 2018, with that figure ballooning to nearly $192.4 billion in 2020. The company's net income is set to grow from around $28 billion in 2018 to north of $40 billion in 2020.

Alphabet clearly generates a lot of cash, but it doesn't exactly give much of that back to shareholders. In its fourth-quarter 2017 earnings release, the company announced that "the Board of Directors (Board) of Alphabet authorized the company to repurchase up to an additional $8,589,869,056 of its Class C capital stock." Considering that Alphabet's market capitalization was north of $870 billion as this is being written, that share repurchase looks quite modest relative to what the company could do.

GOOGL Average Diluted Shares Outstanding (Quarterly) Chart

GOOGL average diluted shares outstanding data (quarterly) by YCharts.

At this point, Alphabet generates so much profit, which is set to grow substantially in the coming years, that I think it makes sense for the company to start giving much more of that cash back to shareholders. A solid and growing dividend seems like a good way to do that.

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Stocks Mentioned

Alphabet Inc. Stock Quote
Alphabet Inc.
$2,240.15 (-3.30%) $-76.52
Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
$160.68 (-5.20%) $-8.81
Apple Inc. Stock Quote
Apple Inc.
$137.44 (-2.98%) $-4.22
Microsoft Corporation Stock Quote
Microsoft Corporation
$256.48 (-3.17%) $-8.41

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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