Here are the takeaways from today's Morning Brief. Sign up to receive the following in your inbox each morning:
A new big tech boom has arrived.
Shareholders not only see the stock price rise, they also receive compensation. Dividends, diminished in importance over the past few decades by the tech boom, are making a comeback thanks to the same companies that made them a thing of the past.
Meta (META) started paying dividends in February, followed by Alphabet (GOOG, GOOGL) in April. And last week saw a price hike by Apple (AAPL).
But why would tech companies start paying now?
The dividend trends reflect the dual role tech giants play in society and on Wall Street. They want to be seen as growth engines, are obsessed with frontier technology, and are obsessed with reinventing the future. But these are also mature, well-funded companies with market capitalizations starting with 'T'.
The former chicks are now apex predators, with decades of experience balancing new investments with a core business that is expanding into virtually every area of life.
These corporate startups will scoff at the idea of paying back dividends. This suggests that the company's era of growth has passed and management has no vision for how to deploy its resources. But in this post-pandemic, pre-AI moment, Big Tech has two priorities: building the infrastructure that will dominate the next era and demonstrating to investors that it has financial discipline and confidence to consistently return value. I want to prove that I can do two things at the same time.
That the recent wave of dividend announcements has come alongside revelations of inflated AI spending reinforces a dual message.
At the same time, however, it also reflects the state of American business, which has dispelled concerns about an unprecedented recession and regained its vitality. Profits are increasing, and along with that comes large-scale stock buybacks. The recent wave of stock buybacks, including Apple's record $110 billion plan, is the largest buyback since 2018.
story continues
“These companies have been making record profits for some time and are seeing value in returning those profits to shareholders rather than investing in capital,” said Alex McGrath, chief investment officer at North End Private Wealth. “There is,” he said. “That's not to say they aren't still investing heavily in growth, but their cash flow has reached a point where this starts to make sense.”
Dividends to shareholders from high-tech companies, even small amounts, provide entry into funds that require dividends. They are broadening their investor base by attracting money from portfolios looking for steady income from dividends or people who simply want their brokerage accounts to “see the numbers go up.”
Part of what made dividends seem cheap and outdated was the staggering profits of Internet companies. The top members of the Dividend Aristocrats come from the consumer staples and industrial sectors. Typically, when we think about dividends, we disconnect from ideas of rapid growth, increased risk, and big returns.
But megatech companies have changed. The same applies to dividend companies. Look at Mark Zuckerberg's brilliance.
Jennifer Kosky, a professor of finance who teaches dividends at the University of Washington's Foster School of Business, says, “When you keep money in-house, you tend to waste it.Paying it teaches you discipline.'' talk. There have been lawsuits against Big Tech companies since before Microsoft (MSFT) launched its own initiative in 2003. “Spending on AI shows we still have growth opportunities.”
As an indication of where things are heading, Koski will be teaching the following payment policy case. This time it's Amazon (AMZN).
Hamza Shaban is a reporter for Yahoo Finance, covering markets and economics. Follow Hamza on Twitter @hshaban.
simple morning image