The fact that Amazon (NASDAQ: AMZN) 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 boasts one of the most stable balance sheets around.
After years of not returning cash to shareholders, even tech giants such as Google parent Alphabet and Meta Platforms initiated payouts in 2024. Still, despite the pressure Alphabet's and Meta's examples might place on Amazon, it 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 cap is about $2 trillion. This makes it the fourth-biggest publicly traded company measured by market cap, and the largest to not return cash to shareholders.
Moreover, investors tend to view dividends as a sign of a company's strength and stability, as one must sustain relatively steady positive cash flows to maintain a payout. From a cash standpoint, Amazon's balance sheet indicates it could support a significant dividend. As of the end of the second quarter of 2024, Amazon held $89 billion in liquidity. The company also generated $53 billion in free cash flow during the past 12 months.
Free cash flow is what's left after the company invests in capital improvements. Hence, even when considering Amazon's $55 billion in long-term debt, there's little Amazon cannot afford to do, including paying a dividend.
Why a dividend is not likely anytime soon
Despite its high degree of financial flexibility, Amazon's shareholders should not expect it to follow in the footsteps of Alphabet and Meta by offering a dividend. The likely reason is Amazon's apparent belief that it can deploy cash better than its shareholders.
One surprising indicator that shows its low likelihood of a dividend payment is the company's share count. Amazon shares outstanding number about 10.5 billion, and despite considerable liquidity, that count has risen by 6% during the past five years.
That pace of share growth is unlikely to undermine its shareholders. Still, the apparent need to dilute shareholders at all is perplexing, given Amazon's liquidity.
Amazon's share repurchase program may only add to this confusion. The company authorized a $10 billion share repurchase program in March 2022. However, as of mid-2024, it had spent only $3.9 billion of that on buybacks, meaning that it remains a net issuer of shares.
Still, in fairness to Amazon, not every mega-cap company believes in dividends. The most prominent opponent of dividend payments is arguably Warren Buffett. Besides a brief experiment with dividends in 1967, Berkshire Hathaway has not offered payouts.
Nonetheless, unlike Amazon, Berkshire Hathaway is a huge proponent of share repurchases and has periodically bought back A shares in the first half of 2024 and earlier. Since Amazon has not commented on this issue extensively, 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 should pay dividends, investors should not consider such a move likely.
Despite achieving a high level of financial stability, Amazon continues to partially fund its expansion plans by issuing shares. It has also chosen not to take full advantage of its share repurchase program, meaning the number of shares outstanding continues to rise.
Thus, until Amazon's management changes its dividend philosophy, investors who want cash from owning Amazon will probably 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 spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Will Healy has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Alphabet, Amazon, Berkshire Hathaway, and Meta Platforms. The Motley Fool has a disclosure policy.
