Amazon’s swelling cash pile makes conditions ripe for dividend

July 25, 2024 Updated Thu., July 25, 2024 at 2:28 p.m.

By Ryan Vlastelica

With a cash hoard that’s expected to top $100 billion this year, conditions have never been more favorable for Amazon.com Inc. join its megacap peers in returning cash to shareholders, including by potentially breaking the seal on a dividend.

The e-commerce giant is cash-rich but stingy compared with the rest of big tech, having long resisted a sustained capital-return program, opting to instead reinvest profits into its businesses. Any hint of a change on this front could drive fresh gains in the stock, which has risen 19% this year, outperforming the 13% gain of the Nasdaq 100 Index.

An announcement may not come on Aug. 1, when Amazon reports second-quarter results. But many, including Andrew Zamfotis, portfolio manager at Ami Asset Management, reckon it will happen within the next few quarters.

“A dividend might be inevitable, and would really signal that it is going to be more focused on spending and profitable growth,” Zamfotis said. “Amazon can certainly afford it, and because of its reluctance to do capital returns even in boom times, I think it would be very meaningful if it followed its peers with a dividend or picked up the pace with buybacks.”

A spokesperson for the firm pointed to last quarter’s earnings call, when Chief Financial Officer Brian Olsavsky said Amazon would continue to prioritize capex and paying down debt over capital returns.

But with free cash flow projected to nearly double this year, many investors think the company could start doing more for shareholders. Adding to the company’s anemic buyback authorization would be one venue for capital returns, but some are speculating about the prospect of Amazon’s first-ever dividend, especially as other tech giants have done so of late.

Rewarding shareholders has been a trend among megacaps this year. Meta Platforms Inc. and Alphabet Inc. both introduced dividends this year, as did Salesforce Inc. and Booking Holdings Inc. The AI-focused chipmaker Nvidia Corp. raised its dividend by 150%, to 10 cents per share.

While tech dividend yields tend to be low, they are a signal that companies are confident about their long-term cash generation and business outlooks. Buybacks, meanwhile, are a way to boost earnings per share, and many of the dividend announcements were accompanied by hefty share buybacks. Meta announced a $50 billion program in February, while Alphabet followed suit by authorizing $70 billion. Apple Inc. approved a $110 billion repurchase, the biggest in history.

Meanwhile, Amazon’s $10 billion buyback program, approved in early 2022, was less than half complete as of the end of March, and it has not repurchased any shares in the past 21 months.

The lack of a dividend now increasingly stands out; Tesla Inc. is the only other Magnificent Seven company without one, and among the components of the Dow Jones Industrial Average, planemaker Boeing Co. is the only other firm to not pay one, having suspended its own at the onset of the pandemic.

Amazon had more than $86 billion in cash at the end of 2023, and it generated $32.2 billion in free cash flow last year; analysts expect that to rise to $61.2 billion this year, according to data compiled by Bloomberg.

However, aside from pouring cash into AI initiatives, the company could struggle to find other uses for its money in this environment. Greater regulatory scrutiny of tech-sector M&A, means takeover options are limited. So without a more aggressive capital-return program, Amazon’s cash balances “could soar to an inefficient excess,” according to Bloomberg Intelligence.

Still, there’s one crucial factor that could deter Amazon from offering a dividend in the near term - its margins are lower than those of other megacaps because of its retail business.

“To start a dividend, Amazon would have to pay a higher percentage of its cash flow than the peers that have already started paying one, which means doing one right now is premature and wouldn’t be good stewardship,” said Brian Szytel, managing director and partner at Bahnsen Group.

“They will get to that place,” said Sytel, who expects margins to keep improving. For now, he added, “we are in a will-they-won’t-they place.”

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