The majority of companies in the S&P 500 pay dividends. Yet when you look at the upper ranks of the illustrious index, you'll find that several of its biggest components don't make dividend payments to their shareholders. In particular, four well-known companies stand out: Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B), Amazon.com (NASDAQ:AMZN), Google (NASDAQ:GOOG), and Biogen Idec (NASDAQ:BIIB). With such successful businesses, many investors want to know why these companies don't reward their shareholders with dividends? Let's look more closely at these non–dividend payers.
Why Buffett will never pay a dividend
Of these four stocks, Berkshire Hathaway offers the best explanation for its lack of a dividend payout. CEO Warren Buffett argues that dividends are almost a last resort for corporate management, suggesting companies should prefer to reinvest in their businesses and seek "projects to become more efficient, expand territorially, extend and improve product lines, or to otherwise widen the economic moat separating the company from its competitors." By holding onto every dollar of cash possible, Berkshire has been able to reinvest it at better returns than most shareholders would have earned on their own.
Some believe Berkshire might start paying a dividend once Buffett is no longer able to lead the company. But with such a strong reputation, whoever succeeds Buffett shouldn't hesitate to use Berkshire's clout in the financial community to keep making high-return investments rather than returning cash to shareholders.
Don't expect good search results from "Google dividend"
Google has been equally clear about its stinginess with investors, saying on its investor website that "we have never declared or paid a cash dividend nor do we expect to pay any cash dividends in the foreseeable future." For many investors, that's good news, not bad.
The reason is that Google has huge potential from trying to expand its business. Google's top executives have an unusually long-term thought process, considering business opportunities that could take decades to pan out. Funding those ideas takes capital, and even though money is cheap right now, retaining the tens of billions of dollars it has for future investment gives Google a competitive advantage over some of its smaller peers. That way, Google will keep evolving rather than falling into the ruts that some other tech giants are stuck in right now.
Amazon wants to keep shopping
Amazon's argument against dividends is similar to those of its peers. CEO Jeff Bezos hasn't been coy about using cash for reinvesting in its business, but in addition, Amazon hasn't been all that focused on generating profits in the first place. Indeed, by keeping margins razor-thin, Amazon puts itself in the best competitive position possible, discouraging would-be entrants to the industry and building up long-term market share.
For Amazon to pay a dividend, it would have to shift its focus toward near-term profits. That would be such a strategic transformation that it would have huge repercussions on Amazon's business for years to come. As a result, investors shouldn't hold their breath that a dividend will come anytime soon.
The next biotech to take the dividend plunge?
When I last looked at this topic, I picked biotech giant Gilead Sciences (NASDAQ:GILD), which recently decided to take the plunge and initiate a dividend for the first time. The same arguments hold true for Biogen Idec, though, especially given the capital-intensive nature of biotechnology research and development.
In short, getting a promising treatment through a clinical pipeline process takes huge amounts of money, with no guarantee of success. Every dollar Biogen pays in dividends is a dollar less it has to promote a potential blockbuster. For biotech investors who want the massive gains from winning drugs and other treatments, paying a dividend seems like a bad move, even for a company like Biogen, which has ample cash flow to divert back to shareholders if it really wanted to.
Many winning stocks pay dividends, but a stock doesn't have to pay a dividend to be a winner. These four companies show the potential benefits from using capital in ways other than simply returning it to shareholders.