Amazon will NOT be the market’s next dividend stock, and here’s why

The fact that Amazon (NASDAQ:AMZN) The fact that .NET is still not a dividend stock may come as a surprise to some investors. It is one of the world's largest publicly traded companies and has one of the most stable balance sheets.

Even tech giants like Google's parent company have not paid out any money to shareholders for years. alphabet And Meta-platforms Payouts are expected to begin in 2024. Despite the pressure that the examples of Alphabet and Meta could put on Amazon, Amazon is unlikely to follow suit. Here's why.

Can Amazon afford a dividend?

At first glance, the lack of a dividend may seem surprising. Amazon's market capitalization is about $2 trillion, making it the fourth-largest publicly traded company by market capitalization and the largest that does not pay out money to its shareholders.

In addition, investors tend to view dividends as a sign of a company's strength and stability, since one must maintain relatively stable positive cash flows to sustain a distribution. From a cash perspective, Amazon's balance sheet suggests that the company could justify a sizable dividend. At the end of the second quarter of 2024, Amazon had $89 billion in cash. The company also generated $53 billion in free cash flow over the past 12 months.

Free cash flow is what's left over after the company invests in capital improvements, so even when you factor in Amazon's $55 billion in long-term debt, there's little Amazon can't afford, including paying a dividend.

Why a dividend is unlikely in the near future

Despite Amazon's high level of financial flexibility, shareholders should not expect the company to follow in the footsteps of Alphabet and Meta and pay a dividend. The likely reason for this is Amazon's apparent belief that it can put its money to better use than its shareholders.

A surprising indicator that shows the low probability of a dividend payment is the number of shares of the company. The number of Amazon shares outstanding is about 10.5 billion, and despite considerable liquidity, this number is risen by 6% over the last five years.

This pace of stock growth is unlikely to hurt shareholders. Still, the apparent need for shareholder dilution is puzzling given Amazon's liquidity.

Amazon's share buyback program is likely to only add to this confusion. The company authorized a $10 billion share buyback program in March 2022. However, by mid-2024, it had only spent $3.9 billion of that on buybacks, meaning it remains a net issuer of shares.

To be fair, however, not every mega-cap company believes in dividends. The most prominent opponent of dividend payments is probably Warren Buffett. Apart from a brief experiment with dividends in 1967, Berkshire-Hathaway did not offer any payouts.

The story continues

Still, unlike Amazon, Berkshire Hathaway is a big proponent of share buybacks and has been regularly buying back Class A shares in the first half of 2024 and earlier. Since Amazon has not commented extensively on the issue, one must assume that it shares Buffett's philosophy on using excess cash.

Amazon and the prospect of a dividend

Although it looks like Amazon should Pay dividends, investors should not consider such a step likely.

Although Amazon has achieved a high level of financial stability, the company continues to partially fund its expansion plans by issuing shares. In addition, the company has decided not to fully utilize its share buyback program, which means that the number of shares issued continues to rise.

Until Amazon management changes its dividend philosophy, investors who want to make money by owning Amazon will likely have to sell shares.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Will Healy has positions at Berkshire Hathaway. The Motley Fool has positions at and recommends Alphabet, Amazon, Berkshire Hathaway, and Meta Platforms. The Motley Fool has a disclosure policy.

Prediction: Amazon will NOT be the market's next dividend stock, and here's why was originally published by The Motley Fool.