It's probably time for Amazon.com (AMZN 1.34%) to consider offering a dividend. I'm not the first person to suggest that quarterly distributions should be the online retailer's prime objective, but the suggestions will only get louder now that Google parent Alphabet (GOOGL 0.51%) (GOOG 0.50%) has hopped on the payout bandwagon.
Alphabet turned heads on Thursday afternoon by initiating a quarterly dividend of $0.20 a share. While that translates to a yield of a mere 0.5%, it's not the point. Alphabet, with its $2 trillion market cap, is no longer the most valuable U.S.-listed company that doesn't shell out a regular distribution. Amazon is wearing that badge now.
Shopping for pocket change
There's nothing wrong with Amazon ignoring the calls that have driven many of the country's most valuable tech stocks to declare dividends. None of the four companies with loftier market caps are yielding more than 0.7%, a pittance these days, with the top money market funds returning better than 5%.
But there's still something to be said for returning money to shareholders. Alphabet's stock is surging on the strength of a blowout quarter, but it also helps that there's a shiny new payout and the board authorized $70 billion in share repurchases. Sharing the wealth makes sense when growth has slowed, and that is certainly the case with Amazon.
After decades of double-digit sales growth, the e-commerce company clocked in with a 9% increase in 2022. It managed to pick up the pace by posting 12% top-line growth last year, but that only means that its two worst years of revenue growth in 27 years of trading just happen to be the two most recent. It's at this point when a mature company typically transforms into a source of investor disbursements, but Amazon might not be ready to go that route.
Yes, Amazon has the money. It generated $36.8 billion in free cash flow last year, hitting a new record for operating income in 2023. Its balance sheet has a reasonable amount of leverage. The problem is that analysts see Amazon growing net sales by a mere 4% this year.
Obstacles are everywhere. Amazon's competition is getting smarter. Physical mass-market retailers have mastered curbside delivery for online orders, but Amazon's own brick-and-mortar presence hasn't been impressive.
There's also the fear that Chinese e-tailers Shein and PDD's (PDD -1.10%) Temu will continue to gain share in Amazon's home market with their deeply discounted products. Although Chinese stocks are out of favor, PDD has been beating Amazon as an investment in recent years. Temu advertised in this year's widely watched Super Bowl.
Even in cloud computing, where Amazon Web Services (AWS) is a juggernaut, it's being challenged. Two tech giants with thriving cloud businesses -- including Alphabet -- seem to be gaining share in the cloud space at Amazon's expense.
Image source: Getty Images.
Answers are coming soon
It won't take long to see if Amazon is ready to join the ranks of dividend payers: It reports its first-quarter results early next week. It's now also less than a month away from its annual shareholder meeting. Even if it doesn't initiate disbursements soon, it would be fair for someone to ask the company about its position.
Amazon isn't cheap at 45 times this year's projected earnings. If it does feel comfortable enough to start cutting checks for its stakeholders, they won't be much. However, payouts could make its shares more appealing to some institutional investors with income mandates.
The move would also signal to investors that the company is comfortable enough in its long-term outlook and cost containment to start distributions. Don't be surprised if Amazon is the next tech giant to initiate a dividend policy.
