Here are the takeaways from today’s Morning Brief. sign up Every morning you will receive the following message in your inbox:
A new big tech boom has arrived.
Shareholders not only see the stock price rise, they also receive compensation. Dividends, diminished in importance over the past few decades by the tech boom, are making a comeback thanks to the same companies that made them disappear.
Meta (META) started paying dividends in February, followed by Alphabet (GOOG, GOOGL) in April. And last week saw a price hike by Apple (AAPL).
But why would tech companies start paying now?
The dividend trends reflect the dual role tech giants play in society and on Wall Street. They want to be seen as growth engines, are obsessed with frontier technology, and are obsessed with reinventing the future. But these are also mature, well-funded companies with market capitalizations starting with ‘T’.
The former chicks are now apex predators, with decades of experience balancing new investments with a core business that is expanding into virtually every area of life.
These corporate startups will scoff at the idea of paying back dividends. This suggests that the company’s era of growth has passed and management has no vision for how to deploy its resources. But in this post-pandemic, pre-AI moment, big tech companies are focused on building the infrastructure that will dominate the next era and demonstrating to investors that they have financial discipline and confidence to consistently return value. We want to prove that we can do two things at the same time.
That the recent wave of dividend announcements has come alongside revelations of inflated AI spending reinforces a dual message.
At the same time, however, it also reflects the state of American companies, which have regained their vitality after dispelling concerns about an unprecedented recession. Profits are increasing, and along with that comes large-scale stock buybacks. The recent wave of stock buybacks, including Apple’s record $110 billion plan, is the largest buyback since 2018.
“These companies have been making record profits for some time and are seeing value in returning those profits to shareholders rather than investing in capital,” said Alex McGrath, chief investment officer at North End Private Wealth. “There is,” he said. “That’s not to say they aren’t still investing heavily in growth, but the cash flow has reached a point where this starts to make sense.”
Dividends to shareholders from high-tech companies, even small amounts, provide entry into funds that require dividends. They are broadening their investor base by attracting money from portfolios looking for steady income from dividends or people who simply want their brokerage accounts to “see the numbers go up.”
Part of what made dividends seem cheap and outdated was the staggering profits of Internet companies. The top members of the Dividend Aristocrats come from the consumer staples and industrial sectors. Typically, when we think about dividends, we divorce ideas of faster growth, greater risk, and greater returns.
But megatech companies have changed. The same applies to dividend companies. Look at Mark Zuckerberg’s brilliance.
Jennifer Kosky, a professor of finance who teaches dividends at the University of Washington’s Foster School of Business, says, “When you keep money in-house, you tend to waste it.Paying it teaches you discipline.” talk. There have been lawsuits against Big Tech companies since before Microsoft (MSFT) launched its own initiative in 2003. “Spending on AI shows we still have growth opportunities.”
As an indication of where things are heading, Koski will be teaching the following payment policy case. This time it’s Amazon (AMZN).
Hamza Shaban is a reporter for Yahoo Finance, covering markets and economics. Follow Hamza on Twitter @hshaban.