Dividends: new era?
Dividends: new era?
Changes in the market
Over the past year, we have seen significant announcements from major companies such as Meta, Alphabet, Salesforce and Booking Holdings which have driven their share prices higher. These companies have all done one thing in common: initiated a dividend.
To dividend growth investors such as us, this is an extremely positive change in capital allocation by some of the world’s largest and most powerful businesses.
What has prompted this change?
We believe there are several reasons.
Firstly, the higher levels of interest rates means there is greater competition for investors’ capital, and there are few better ways to remind investors of your prodigious and high-quality cash generation than to return a portion of it through a dividend.
Another common trait that might have prompted this change is that these companies have very strong balance sheets. For example, at the time of writing (July 2024) Alphabet had $108bn of cash and securities on its balance sheet and the others are all net cash. Why not remind investors that they are extremely well financed?
It is also important to remember that the ultimate decision to initiate the dividend is made by the Board of Directors collectively. We have observed that as these companies have matured, the board composition has evolved. Whilst initially they had strong representation from those who helped “build” the internet, newer members typically have extensive listed company experience – and often with companies that have a long and rich history of paying dividends. It seems natural that they would be keen on dividends as a form of capital allocation.
Signals in initiating dividends
There are also idiosyncratic reasons why this makes sense for these companies.
In the case of Meta and Salesforce, both companies have been criticised in the past for either profligate capital expenditure or being overly acquisitive. By initiating a dividend, they have introduced a disciplining factor that should create a tension within the capital allocation decision making framework, leading to superior decision making whilst also reassuring investors.
Meanwhile, in the case of Alphabet and Booking Holdings we interpret a different type of signal: one of confidence. The message we think they want to convey to us is that they have won their markets (respectively, search and online travel) and believe their competitive advantages are now so strong that they can both reinvest and pay growing dividends back to shareholders.
Finally, it has also become more commonly understood that companies that pay a growing dividend outperform with superior risk adjusted returns1. Who wouldn’t want to be part of that?
1Source: Ned Davis Research, Inc. and Refinitiv, 31 Jan 1973 – 31 Dec 2023. Copyright 2024 © Ned Davis Research, Inc. All rights reserved.
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