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Tech Giant Alibaba Could Be Dividend Winner

Tech Giant Alibaba Could Be Dividend Winner
Mohamed Ahmed Soliman | Dreamstime.com

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Tuesday, 30 July 2019 09:40 AM Current | Bio | Archive

When companies decide to pay shareholders a dividend, it is typically because the business model has matured. Once a company reaches a state of maturity, it typically no longer needs to invest as heavily in growing the business.

At this point, the company discovers that it generates enough cash flow to meet its growth objectives, with enough left over to distribute to shareholders. When a business achieves high levels of free cash flow, it can initiate a dividend because those dollars are not needed as much in order for the company to grow.

Many technology companies do not pay a dividend as they are still growing and need large amounts of capital to do so. Unlike many technology companies that burn through cash and are not profitable, Alibaba (BABA) is already profitable and enjoys positive free cash flows.

However, Alibaba does not pay a dividend today. The question is, with a profitable business that is producing free cash flow, might Alibaba one day pay a dividend?

Business Overview

Alibaba is a large e-commerce company that provides online and mobile services in many international markets, the most important of which is China. Working in Alibaba’s favor is that the Chinese middle class is achieving rapid expansion. This group is expected to double from 300 million to 600 million over the next decade. This will allow more people in China to hold discretionary income. With a strong presence in China, Alibaba is poised to capitalize.

The company is composed of four divisions: core commerce, cloud computing, digital media and innovation initiatives. Core commerce is the largest contributor to revenue and earnings.

Alibaba last reported earnings results on May 15th. Revenue increased 51% for the quarter, as the core commerce division grew 54%. For the fiscal year, Alibaba’s adjusted revenue increased 39% as active consumers grew from 552 to 654 million, while mobile customers grew 104 million to 721 million. These are massive gains in customers in a single year.

As seen by its growth in both revenue and users, Alibaba is definitely a high growth tech company. But unlike many companies in this space, Alibaba also produces profits. Earnings-per-share grew 27% to $4.97 for the fiscal year. Earnings-per-share have tripled since Alibaba had its initial public offering in 2014.

While Alibaba reinvested 80% of revenue into its business in the most recent quarter, the company also produced a lot of free cash flow. In fact, free cash flow increased from $2 billion in 2013 to $14.7 billion in the most recent fiscal year.

Other high growth technology companies like Netflix (NFLX) and Uber (UBER) are unable to match Alibaba’s profitability or free cash flow generation.

Reasons For A Dividend

With a booming business, it is only natural for investors to ask if Alibaba will eventually pay a dividend.

As previously stated, the company produced almost $15 billion in free cash flow over the last year. Some of this capital went towards repurchasing 11 million shares. This share repurchase was done to offset shares awarded to management as the share count actually increased slightly in fiscal 2019.

Alibaba also has initiated the process for a secondary listing on the Hong Kong stock exchange. The company aims to raise approximately $20 billion from this secondary listing. The capital raised here will not be returned to shareholders, but be used to further fund the company’s growth initiatives.

Considering that the company is growing at a rapid pace, investors should not be surprised that Alibaba doesn’t pay a dividend. At the moment, it is much more profitable for management to invest in its business than to begin making dividend payments.

Final Thoughts

Alibaba is the rare high growth technology company that is already profitable and generating free cash flow. But with a high growth rate, now is not the time for the company to pay a dividend.

All available capital is needed to continue growing the business as Alibaba is likely to benefit from a growing Chinese middle class. Using capital to pay a dividend would only divert needed dollars to produce future growth.

For these reasons, we don’t anticipate Alibaba paying a dividend in the near future. That said, the potential exists for Alibaba to become a dividend stock at some point, if its growth prospects slow down somewhat or if the company continues to grow its free cash flow.

Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.

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BenReynolds
Alibaba is the rare high growth technology company that is already profitable and generating free cash flow. But with a high growth rate, now is not the time for the company to pay a dividend.
alibaba, dividend, tech, stock
752
2019-40-30
Tuesday, 30 July 2019 09:40 AM
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