Big Tech is becoming Big Cash


In fact, the technology industry has the potential to pay out huge sums of cash to shareholders over the next decade. If it happens that will have huge significance for the markets globally.

Why? Because dividends are fundamentally what drives the stock market, and if Big Tech could start to rival Big Oil and Big Pharma in paying billions to investors that will power the next leg of the bull market.

Making money

The major technology companies have always grown rapidly. As they move into their second or third decade, they are starting to do something else as well. Make some money.

Amazon this week reported that it made a record $US3.6 billion in profits over the first quarter of 2019. It has now reported record profits for four quarters in a row. The days when people wondered whether Jeff Bezos’s juggernaut could ever make any actual money now look safely in the past.

Microsoft this week reported record profits of more than $US8 billion for the quarter, and revenues of more than $30 billion, and it became the third company to break through the $US1 trillion market value barrier.

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Facebook reported a 26 per cent rise in revenues, way ahead of expectations, and a similar surge in profits, and that was despite $US3 billion in potential legal charges. When Apple reports its earnings next week they are likely to be just as impressive. With its streaming services starting to chip in significantly, its cash machine shows no sign of slowing down.

Likewise, Alphabet, the parent of Google, is likely to report bumper profits, even after the now monotonously regular few billion euros in fines from the EU are paid for.

At a certain point, companies that make big profits are going to take the next obvious step. Start sharing some of that with their shareholders. Inevitably that takes a while.

Microsoft only paid its first dividend in 2003, long after it became the dominant software company in the world.

Apple paid some dividends in the Eighties, but stopped in 1995, and paid out nothing at all to shareholders during the 17 years in which the phenomenal success of the iPhone made it the biggest company in the world. It only started paying out again in 2012.

Dividends from Facebook, Amazon, Alphabet?

This year, those two tech giants may finally have some company. There is already speculation on Wall Street that both Facebook and Amazon may pay their first dividends to shareholders this year. So might Alphabet. Facebook can certainly afford to, with earnings that comfortably allow for a payout, and so could Alphabet.

And while Amazon may well choose to spend a another few billion on launching lots of new products it may well resolve to finally pay out some cash to shareholders as well.

The important point, however, is this. It probably doesn’t matter that much whether it is this year or next. At some point, these companies are all going to start paying something.

That’s what companies do, and the shareholders won’t tolerate zero dividends from hugely profitable companies forever. In truth, it is only a matter of time. Once the dividends do start to flow, they could potentially be massive. Why? There are two reasons.

First, the tech giants are simply enormous businesses, with lots of growth still left in them. Amazon had sales of $US141 billion last year, and will be well ahead of that in 2019. It is more than the GDP of a medium sized country.

Apple is already sitting on a cash pile of close on $US250 billion and it keeps growing all the time. As they push into new industries, the sums they generate will get bigger and bigger.

Secondly, compared to most traditional industries technology doesn’t consume much in capital investment. Sure, Apple might blow a couple of billion on its new TV streaming service, and Alphabet may decide to roll the dice on a billion of spending on one of its wackier projects but none of it will make much of a dent in their quarterly earnings.

Powering the market

That is going to make a significant difference to the whole market. Dividends are what fundamentally underpin and drive the price of equities. After all, the right to a share of the profits a company makes is what makes owning a tiny slice of it valuable.

If the tech companies start paying out tens of billions in dividends, that is going to do two things. It will drive share prices higher. And it will mean vast sums are returned to investors and pension funds, most of which will be recycled into new investments, driving all the main indexes higher.

Over the last couple of decades, a few big industries – most notably Big Oil and Big Pharma [or in Australia, the Big Miners] – have traditionally paid out vast sums of cash.

That flow of cash has supported the whole market, and, which is hardly a minor matter, paid for a lot of pensions.

In the next few years, Big Tech is likely to join them. And that could turn into the basis for another leg to what is already a very long bull market.

The Daily Telegraph, London

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