When it comes to returning capital to shareholders, dividends are generally considered the yardstick showing a company’s belief in sustainable earnings for years into the future. Investors know that dividends in income stocks now account for a large portion of total returns through time. The reminder that the bull market was interrupted ahead of its seventh anniversary is another issue. Investors seem to want the higher quality stocks, or at least those with predictable earnings and with solid dividends.
So what about the companies that could easily pay dividends but simply refuse to do so? 24/7 Wall St. has identified six solid technology companies that are deemed to have a safe earnings floor but that are choosing to use cash in other methods on behalf of their shareholders. These should be considered the dividend sinners, or dividend misers, even if they are great tech giants. This is also not meant to bash a stock’s performance — some have in fact been quite stellar.
The market has pulled back in 2016 and it seems that this is a good time for investors to reflect on which companies are treating their shareholders the best. Investors generally have done well historically by investing in growth and technology, and they have done well by investing in dividend stocks. They can invest in technology and growth and get handsome dividends, now that one-sixth of the Dow Jones Industrial Average is dividend paying tech stocks.
24/7 Wall St. has written about many companies in recent years that needed to start paying a dividend. Some of them have started to do just that, including Amgen, Apple, Cisco, EMC, Gilead, Nasdaq, Teradyne and more. It seems more than likely that the so-called dividend aristocrats, those companies that have hiked their dividends for 25 years in a row, could eventually be full of technology stocks.
In normal investing terms, it seems fitting to call companies that could easily pay a dividend but refuse to do so by the name dividend sinners or misers. As of the start of 2016, there were fewer than 80 members of the S&P 500 that do not pay dividends. It was just two or three years ago that the figure was closer to 100 companies of the S&P 500.
24/7 Wall St. is evaluating technology companies that either should start paying a dividend or that it believes will do so. In order to qualify, each of these tech stocks needs to have had positive earnings per share (EPS) for years, and they cannot have other factors that might have presented a hurdle to being able to afford a dividend in the relatively near future. For instance, a company with a price-to-earnings (P/E) ratio of 100 should not be expected to be a huge dividend payer, even paying out 100% of income would yield only 1%, in theory.
Here are the 2016 dividend sinners (or dividend misers) in the technology sector from 24/7 Wall St. Not only are these established tech stocks, they are all members of the S&P 500 Index.
Adobe Systems Inc. (NASDAQ: ADBE) seems to have not gotten the message that most of the highly established tech stocks in the S&P 500 now pay dividends. That being said, Adobe used to pay a tiny dividend and decided to end it in 2005. The administrative effort and cost of a dividend was part of why it stopped, as well as growth opportunities and using cash more efficiently. Now fast forward to 2016, and it may be that Adobe is more concerned with the ongoing transition of its business rather than sending money back via a dividend check to shareholders. Adobe has chosen to repurchase its shares instead, with the 2015 buyback plan being up to another $2 billion after buying back stock in prior years.
With a market value of $43 billion, and with spending money on share buybacks, the real issue is how much Adobe can or would commit to a dividend payment when it is valued at close to 30 times expected earnings. The company is using its $4 billion cash balance to fund buybacks, and Adobe has been an acquirer of companies from time to time in the market. Adobe has been public since the 1980s, and shares blasted off to new all-time and split-adjusted highs in 2013.
Adobe shares were recently trading at $87.04, with a consensus analyst price target of $103.83 and a 52-week trading range of $69.04 to $96.42.
Could Alphabet Inc. (NASDAQ: GOOGL) be on its way to within striking distance of unseating Apple as the most valuable company in the world by market cap? The reality is that the multi-class structure of shares makes that a misnomer because so much of the control is locked away and out of reach.