Prediction: Amazon WON’T Become the Market’s Next Dividend Stock, and Here’s Why | The Motley Fool

The fact that Amazon (AMZN -0.27%) The fact that it is not yet a dividend-paying stock may surprise some investors. It is one of the largest publicly traded companies in the world and has one of the most stable balance sheets in the world.

After years of failing to return cash to shareholders, even tech giants like parent company Google Alphabet and Target platforms Payments were set to begin in 2024. However, despite the pressure that Alphabet and Meta’s examples could put on Amazon, it is unlikely to follow suit. Here’s why.

Can Amazon Afford a Dividend?

At first glance, the lack of dividends may seem surprising. Amazon’s market capitalization is roughly $2 trillion, making it the fourth-largest publicly traded company in terms of market capitalization and the largest that does not return cash to shareholders.

Additionally, investors tend to view dividends as a sign of a company’s strength and stability, as relatively stable positive cash flows are necessary to maintain a payout. From a liquidity standpoint, Amazon’s balance sheet indicates that it could support a significant dividend. As of the end of the second quarter of 2024, Amazon had $89 billion in liquidity. The company also generated $53 billion in free cash flow over the trailing 12 months.

Free cash flow is what’s left after the company invests in capital improvements. So even when you consider Amazon’s $55 billion in long-term debt, there’s little Amazon can’t afford to do, including paying dividends.

Why a dividend is unlikely anytime soon

Despite its high degree of financial flexibility, Amazon shareholders should not expect it to follow in the footsteps of Alphabet and Meta and offer a dividend. The likely reason is that Amazon seems to believe it can invest its cash better than its shareholders can.

One striking indicator that shows the low likelihood of dividend payments is the number of shares the company has. Amazon shares outstanding total approximately 10.5 billion, and despite considerable liquidity, that number has been increasing. resurrected by 6% over the past five years.

That pace of stock growth is unlikely to hurt shareholders. Still, the apparent need to dilute them is puzzling, given Amazon’s liquidity.

Amazon’s share buyback program may contribute to this confusion. The company authorized a $10 billion share buyback program in March 2022. However, by mid-2024, it had spent only $3.9 billion on buybacks, meaning it remains a net issuer of stock.

However, to be fair to Amazon, not all large-cap companies believe in dividends. The leading opponent of dividend payments is undoubtedly Warren Buffett. Aside from a brief experiment with dividends in 1967, Berkshire Hathaway has not offered payments.

Unlike Amazon, however, Berkshire Hathaway is a big proponent of share buybacks and has periodically repurchased Class A shares in the first half of 2024 and before. Since Amazon has not commented extensively on this topic, one has to assume it shares Buffett’s philosophy on how to use excess cash.

Amazon and the prospect of a dividend

Although it looks like Amazon ought pay dividends, investors should not consider such a move likely.

Despite having achieved a high level of financial stability, Amazon continues to partially finance its expansion plans by issuing shares. In addition, it has chosen not to take full advantage of its share buyback program, meaning that the number of shares outstanding continues to increase.

Therefore, until Amazon management changes its dividend philosophy, investors who want to raise cash by buying Amazon stock will likely have to sell shares.