Dividend stocks are in fashion right now among investors. A sustained run of low interest rates on fixed-income assets will do that.
Yet, while dividends are a key foundation for many stocks, with their quarterly payouts buffering volatility and enhancing longer-term returns, many companies prefer to reward shareholders in other ways or simply use their cash to build their businesses.
Seventy-eight companies in the S&P 500 index, a proxy for larger U.S. companies, don’t pay a regular dividend on their common stock—though nearly all are authorized to repurchase their shares. Some of these nonpayers, such as Berkshire Hathaway (ticker: BRK.B), Facebook (FB), United Airlines Holdings (UAL), and Amazon.com (AMZN), are household names. Others are less prominent. Those include Keysight Technologies (KEYS), Henry Schein (HSIC), and Copart (CPRT). (A full table of all 78 nonpayers is at the end of this article.)
“The question is how to maximize shareholder value,” says Jim Paulsen, chief investment strategist at the Leuthold Group. “Is it best to use cash flow for capital-spending programs to boost future growth, pay down debt burdens, buy back stock, or raise the dividend?”
Passing on Payouts
These seven companies are among the 78 S&P 500 members that don’t pay a dividend on their common stock.
Cash and debt levels are for the latest reported quarter. Share repurchases are for the latest reported fiscal year. Stock prices as of Nov. 5. Long-term debt excludes lease obligations. Berkshire’s long-term debt applies to its insurance and other businesses. Cash includes railroads, utilities, and energy businesses.
Sources: FactSet; company reports
A growing demand for yield is what has elevated the profile of dividend payers—and the voices of those calling for dividends from some nonpayers—in recent years. With interest rates so low, dividend stocks look more attractive relative to bonds in terms of their income. The S&P 500’s average yield is about 2%, while the 10-year U.S. Treasury note was recently yielding about 1.9%, down from 3.2% last November. Dividend stocks also help juice long-term returns: From January 1926 through October 2019, the S&P 500’s annual return was 10.2%, with reinvested dividends accounting for nearly 40% of that.
To identify nonpayers in the S&P 500 with the wherewithal to initiate a dividend, Barron’s tapped Tom Browne, a co-manager of the Keeley Mid Cap Dividend Value fund (KMDVX). Using FactSet data, Browne put together a spreadsheet analyzing these companies’ debt loads, how much a dividend would cost assuming a 2% yield as a starting point, and whether companies have been buying back their own shares, among other factors.
But there is no template as to whether a company pays dividends. Firms have a variety of reasons for forgoing them—from poor free cash flow to hefty debt burdens to simply having better uses for corporate funds.
Another potential reason for dividend aversion is that shareholders pay taxes on the payouts, making that option less attractive to an owner/manager who has a big stake in the firm or someone trying to manage their tax burden. What’s more, because investors come to expect dividends, companies are loath to initiate them until they’re certain they can be paid consistently.
“ We don’t believe that a dividend would be the best use of the cash resources. We are looking at other opportunities for utilizing the cash. ”
Exhibit A for a dividend holdout is Berkshire Hathaway. The company hasn’t declared a cash dividend since 1967.
In a 2012 letter to shareholders, Warren Buffett wrote that “our shareholders are far wealthier today than they would be if the funds we used for acquisitions had instead been devoted to share repurchases or dividends.” Buffett also outlined how it would be more efficient for investors to sell a percentage of their shares annually, an approach he feels makes more sense than paying a dividend. He also cited the unfavorable tax consequences of dividends, among other issues. Ironically, many of the firm’s investment holdings do pay dividends.
Fast-forward to today.
David King, a senior portfolio manager at Columbia Threadneedle Investments who specializes in income investments, believes that it’s time for the company to start paying a dividend, in part because it has been a few years since the firm used its cash to make a big acquisition—the $33 billion it paid for Precision Cast Parts in early 2016.
“If they want to keep $128 billion of cash on the balance sheet, it’s dividend time,” King says. The company’s success “has led to a cash hoard and a cash-flow profile that is far greater than the opportunities they are likely to see anytime soon.”
As of Sept. 30, the company’s cash totaled about $128 billion. With a 2% dividend yield, Berkshire Hathaway’s dividend would have cost $4.42 a share recently for a total of roughly $6.1 billion.
Berkshire Hathaway didn’t respond to requests for comment.
“ There could be a time in the future we have a discussion about dividends, but right now we like the strategy we’ve implemented. ”
Some companies, typically those earlier in their development cycles, are growing rapidly and believe that their cash is better spent on buying other companies or ramping up their capital expenditures. Many of these companies are in the technology sector and are considered growth stocks, as evidenced by their higher price/earnings ratios.
Two dividend holdouts in this vein are Facebook and Google parent Alphabet (GOOGL).
Ben Kirby, a co-manager of the Thornburg Investment Income Builder fund (TIBAX), says that both companies “are already at a stage where shareholders deserve a dividend, and where capital discipline should be imposed on management through a dividend payout.”
Facebook, however, is of the mind that its cash is best used on stock buybacks, capital expenditures, and acquisitions. In its third-quarter securities filing, the social-media behemoth doubled down on an assertion it has made for years: “We do not intend to pay cash dividends for the foreseeable future.” The company said that it plans to retain future earnings “to finance the operation and expansion of our business and fund our share-repurchase program.”
In the first nine months of 2019, Facebook repurchased about $3 billion of its class A common stock. As of Sept. 30, the company had about $52.3 billion of cash, cash equivalents, and marketable securities—and minimal debt. Since 2012, Facebook purchased WhatsApp for $19.6 billion, Oculus for $2.2 billion, and Instagram for $1 billion.
A dividend at a 2% yield would cost roughly $11 billion, compared with the $22 billion of free cash flow that analysts polled by FactSet expect in 2020.
As for Alphabet, finance chief Ruth Porat told investors in 2016 that “we’ve previously stated that we don’t intend to initiate a dividend in the foreseeable future.” That policy hasn’t changed.
In the first nine months of 2019, Alphabet repurchased about $12.3 billion of its capital stock. It also has a formidable cash hoard, most recently at about $121 billion—versus long-term debt of $4.1 billion.
A dividend at a 2% yield would amount to about $16 billion. That compares with the roughly $36 billion of free-cash flow analysts expect in 2020.
Facebook and Alphabet declined to comment, pointing instead to filings that outline their capital-return strategies.
Thomas Huber, who manages the $13 billion T Rowe Price Dividend Growth fund (PRDGX), says there is a common misperception that “if the company pays a dividend, it’s no longer a growth company, and that simply is not true.”
“Why wouldn’t you want to invest in a company that’s throwing off more cash than it needs?” he asks.
Paulsen agrees. Initiating a dividend, he says, “would not represent an admission of aging as much as it would be taking advantage of a rare opportunity to boost shareholder value by feasting on investor excess demand for yield.”
Still, many well-established tech companies do pay a dividend.
These include Apple (AAPL), Microsoft (MSFT), and Cisco Systems (CSCO). Those stocks yield 1.2%, 1.4%, and 2.9%, respectively. To be fair, they have been around longer and are arguably at more mature stages of their development than Facebook, Alphabet, and Amazon.
When Apple announced that it was initiating a dividend in March 2012, CEO Tim Cook explained it this way: “We concluded that we had plenty of cash to run the business. And given that, we felt it would be the right action to initiate a dividend and expand Apple’s shareholder base in the process.”
Another S&P 500 member with no payout: Monster Beverage (MNST), which makes energy drinks, has not “paid cash dividends to our stockholders since our inception, and [we] do not anticipate paying cash dividends in the foreseeable future,” the company’s 2018 annual report stated.
Monster Beverage, whose origins include the founding of Hansen’s in the 1930s, has traded publicly at least since 1990.
“We don’t believe that a dividend would be the best use of the cash resources,” the company’s longtime CEO, Rodney Cyril Sacks, said at Monster’s annual meeting in June 2018. “We are looking at other opportunities for utilizing the cash.”
Monster repurchased nearly $400 million of its common stock in the first nine months of 2019, compared with about $800 million in the year-earlier period.
“ If they want to keep $128 billion of cash on the balance sheet, it’s dividend time. ”
On the plus side of Monster repurchasing shares instead of issuing a dividend is that the stock is relatively cheap compared with its own history. It recently fetched about 25 times what it’s expected to earn over the next year, well below its five-year average of more than 32 times, according to FactSet.
An argument for the beverage firm initiating a dividend, however, is that it had minimal debt and about $1.3 billion of cash and short-term investments as of Sept. 30.
Based on its recent stock price and assuming a yield of 2%, a dividend would equate to $1.13 a share for Monster, or roughly half of its estimated free cash flow in 2020.
Monster declined to comment for this article.
Some of the nonpayers carry a lot of debt. For example, medical device firm Boston Scientific (BSX) has halted a share-repurchase program as it focuses on cutting debt. “But beyond that,” CEO Michael Mahoney said at a conference in May, corporate cash use is “really going to be on smart M&A and share repurchase as you look out over that kind of three- or four-year period.”
To wit: In August, Boston Scientific closed a $4 billion acquisition of BTG, a London-based health-care firm.
PayPal Holdings (PYPL) doesn’t offer a dividend, either. Its CEO, Daniel Schulman, told analysts in late October that there was “no change in our capital allocation.” A key ingredient is acquisitions. In September 2018, for example, it paid about $2 billion in cash for iZettle AB, a Swedish payments company. It’s also buying back its stock.
PayPal arguably does have the financial strength to pay a dividend, however. For one thing, its recent cash and investments of about $10 billion exceeds its long-term debt of about $5 billion. And in the first nine months of this year, it bought back $1.1 billion in its own stock.
A 2% yield would amount to a dividend of about $2 a share, costing roughly $2.4 billion—or about half of the free cash flow that analysts expect it to throw off next year.
PayPal and Boston Scientific declined to elaborate on their dividend policies.
Some nonpayers stand out for flying solo in a sector where dividends are common. One is United Airlines. Many of its peers do pay one, including Delta Air Lines (DAL), Alaska Air Group (ALK), and Southwest Airlines (LUV).
Based on United’s recent stock price, a 2% yield would amount to $1.86 a share and cost about $470 million.
However, the company’s debt recently totaled $12.9 billion, versus cash of about $5 billion, and it has a manageable ratio of enterprise value to earnings before interest, taxes, depreciation, and amortization. What’s more, the stock is pretty cheap, trading at about 7.5 times its 2020 profit estimate, versus its five-year average of nearly eight times. The company bought back $363 million of its shares in the third quarter alone.
To take advantage of the stock’s low valuation, United has favored buybacks over paying a dividend. The company declined to elaborate.
Speaking in September, United’s chief financial officer, Gerald Laderman, said “there could be a time in the future we have a discussion about dividends, but right now we like the strategy we’ve implemented.”
United’s stock is up about 11% this year, trailing Alaska, Delta, and Southwest. It arguably would fly higher with a dividend.
These 78 companies, all members of the S&P 500, do not pay a dividend, preferring to buy back stock, make acquistions, pay down debt or keep their powder dry. Some companies, such as Alphabet and United Airlines Holdings, do have the financial ability to pay one but chose not to.
Data as of Nov. 5
Write to Lawrence C. Strauss at firstname.lastname@example.org