Tags: amazon | growth | dividend | investors

Will Amazon's Growth Ever Result in a Dividend?

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Tuesday, 18 December 2018 03:34 PM Current | Bio | Archive

It wasn’t too long ago that dividends and technology stocks could hardly be mentioned in the same sentence. Technology is a notoriously cyclical and highly competitive industry.

This is why technology companies were once extremely reluctant to pay dividends to shareholders.

Times have changed, particularly since the bursting of the tech bubble and the Great Recession. After suffering steep losses, shareholders of more tech companies began clamoring for dividends. But not all technology companies have obliged.

Amazon.com, Inc. (AMZN) remains one of the holdouts. Despite the fact that the stock sports a market capitalization of $778 billion, Amazon does not currently pay a dividend to shareholders. And while shareholders should not expect a dividend in the near future, Amazon could have the ability to initiate a dividend at some point in the next several years.

Explosive Revenue Growth, But Profits Lag Behind

The hallmark of a growth stock is massive revenue growth over time, and Amazon is no different. Last year, Amazon generated revenue of $177.87 billion. The company has grown revenue by approximately 28% per year over the past 10 years. Amazon’s growth has continued in 2018. Last quarter, sales increased 29% from the same quarter a year ago.

But despite its huge revenue, profits have proved to be elusive for Amazon over the past decade. That is, until recently. In 2014, Amazon generated a net loss of $241 million, or a loss of $0.52 per share. With inconsistent profitability, it is difficult for a company to pay dividends to shareholders. Like many high-growth tech companies, for the better part of the past decade Amazon needed every spare dollar of cash flow to reinvest in the business.

Amazon’s massive investments have paid off, as the company rose to dominate e-commerce. It is the unquestioned leader in online retail. The broad, industry-wide downturn taking place across the brick-and-mortar retail industry is largely because of Amazon. By offering consumers the convenience of online shopping and fast delivery, Amazon has become a household name.

Still, the downside of such rapid expansion is that Amazon still does not pay a dividend to shareholders. That said, Amazon has starting to rack up significant profits. Thanks in large part to its high-margin Amazon Web Services cloud business, Amazon’s earnings-per-share growth is finally starting to catch up to its revenue growth.

Why Amazon Might Pay a Dividend — Someday

Since it last reported a net loss in 2014, Amazon has turned on the spigot of profitability. The company generated positive earnings of $596 million, or $1.25 per diluted share, in 2015. Since then, earnings-per-share grew to $4.90 per share in 2016, and $6.15 per share last year. In theory, Amazon could pay a dividend, now that is it generating positive earnings. For example, if the company chose to distribute 25% of its 2017 earnings, it would amount to an annual dividend of roughly $1.54 per share. However, this would represent a current dividend yield of just 0.1%, which would be hardly enticing for income investors.

The first step toward a company paying a dividend is consistent profitability. Management needs to be confident that the company will be able to generate a strong profit from year to year, and that the dividend is sustainable. Now that Amazon has become steadily profitable, there is room to distribute a portion of its annual profits to shareholders as a dividend.

The company is still not likely to do that, as it has multiple growth initiatives which require continued investment. Its core retail business carries low margins, and the company is working to expand in new areas. For example, in 2018 Amazon acquired online pharmacy PillPack for just under $1 billion, which could signal a bigger move into healthcare. Amazon is also preparing to spend $5 billion to build two new headquarters, in New York City and Virginia.

It is safe to say that Amazon’s growth stage is not over. As a result, in all likelihood the company will continue to not pay a dividend. Instead, Amazon’s most likely course is to continue reinvesting excess cash flow into its growth initiative. But those considering Amazon for the possibility of a dividend, not all hope is lost.

If Amazon continues to post rising profits, and its investment spending requirements have diminished, there is potential for a dividend someday.

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
Amazon.com, Inc. (AMZN) remains one of the holdouts. Despite the fact that the stock sports a market capitalization of $778 billion, Amazon does not currently pay a dividend to shareholders.
amazon, growth, dividend, investors
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2018-34-18
Tuesday, 18 December 2018 03:34 PM
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