The S&P 500 (SNPINDEX:^GSPC) has hundreds of dividend-paying companies within its ranks. But strangely enough, some of the largest, most successful companies in the S&P 500 don't pay dividends. Among them are four giants of American industry: Google (NASDAQ:GOOGL), Berkshire Hathaway (NYSE:BRK-B), Amazon.com (NASDAQ:AMZN), and Gilead Sciences (NASDAQ:GILD). Why haven't these companies paid money back to their shareholders? Let's take a closer look.
Tech times two
Tech companies were slow to get on the dividend bandwagon, and both Google and Amazon have been holdouts for a long time. In the case of the online search giant, investors have believed it's inevitable that Google will eventually pay a dividend. With almost $55 billion in cash and short-term investments against just $7 billion in total debt, there's no reason Google couldn't pay a dividend if it wanted to. The company might argue that it wants to keep cash on hand to make major strategic moves, but even the massive buyout of Motorola Mobility cost the company just $12.5 billion. Despite the perceived stigma of dividend-paying tech companies as having gone beyond their highest-growth period, there are more good reasons Google should go ahead and give investors a payout now.
For Amazon, the arguments aren't quite as good as Google. Amazon has only $7.7 billion in cash and short-term investments against $3 billion in debt, and moreover, Amazon isn't nearly as profitable as Google is currently. That's largely because Amazon has chosen to reinvest cash flow into its business and concentrate on maximizing revenue even at the expense of short-term profit margin growth. Whenever Amazon decides to flip the switch and start focusing on maximizing profit, it should also be able to reverse course and start paying a significant dividend soon thereafter.
Gilead is just one of many biotech stocks that don't pay dividends. Compared with Amgen, the only major biotech company that does pay a dividend, Gilead doesn't generate nearly the same amount of free cash flow to support a regular payout. The company has repurchased shares in the recent past, but instituting a dividend would mean making a long-term commitment to return capital through thick and thin, and Gilead seems loath to do that.
Within the industry, that makes a degree of sense. Biotech development is capital-intensive, and with the need to bolster pipelines consistently, Gilead can't afford to skimp on R&D expenses simply to give shareholders a bonus. For now, Gilead seems better served putting its capital back into growing its business.
The unthinkable: a Berkshire dividend?
For decades, Berkshire's Warren Buffett has resisted paying a dividend. Despite recognizing the wish among many of his shareholders to institute a payout, Buffett believes that Berkshire investors are better served when the company reinvests cash to generate higher returns than if Berkshire simply pays that money back to investors. So far, those profitable opportunities have been present, and so Buffett hasn't started a dividend.
The big question is whether Berkshire will pay a dividend once Buffett is no longer at the helm. Such a reversal wouldn't be unheard of, as Steve Jobs was equally adamant about not letting Apple pay a dividend, yet successor Tim Cook didn't hesitate to start paying one. For now, though, Berkshire investors would prefer the benefit of Buffett's high returns even if it means not getting dividend payments.
Fool contributor Dan Caplinger owns shares of Berkshire Hathaway and Apple. You can follow him on Twitter: @DanCaplinger. The Motley Fool recommends Amazon.com, Apple, Berkshire Hathaway, Gilead Sciences, and Google and owns shares of Amazon.com, Apple, Berkshire Hathaway, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.