Dividends are an important component when it comes to investing. It isn’t merely about rewarding shareholders by returning some cash to them — it’s about efficient use of capital and free cash flow by successful companies.
Management at companies where free cash flow is large, where cash position relative to debt is high, and where the future suggests that things will only improve, should pay out dividends.
Not only that, they should usually pay out dividends in lieu of buying back stock.
I hate stock repurchases in general, because companies will spend tons of money buying their own stock at the wrong time. A company should buy back stock when its stock is clearly undervalued. However, companies have been buying back stock to financially engineer their P&L statement.
By reducing the number of shares outstanding, earnings per share can be lifted, making it seem like growth is stronger than it is.
Here are three companies that should be paying dividends but aren’t.
Should-Be Dividend Stocks: Alphabet Inc (GOOG, GOOGL)
For starters, it has $80 billion of cash and equivalents, and barely any debt.
From the standpoint of operational cash flow, it pumped out $26 billion for the entire fiscal year 2015. That was offset by $9.9 billion in cap ex. Thus, free cash flow came in at about $16 billion.
The float is 589 million shares, meaning it could pay $10 per share in dividends and only pay out a third of its free cash flow. Bump it up to $20 per share and then GOOGL would be putting out about $11.8 billion in dividends. That is admittedly a lot, but it would translate to a substantive yield of 1.7%.
Should-Be Dividend Stocks: Biogen Inc (BIIB)
Biotech companies tend to be pretty stingy when it comes to paying dividends. That’s understandable, because free cash flow really needs to get pumped into R&D, which is the real lifeblood of biotech. If a company doesn’t discover new drugs, it will eventually die out.
Still, Biogen Inc (BIIB) makes plenty of net income ($3.55 billion in FY15), had operational cash flow of $3.72 billion (up from $2.94 billion and $2.35 billion in FY14 and FY13, respectively), and free cash flow of $3.07 billion in FY15. It has over $7 billion of cash and investments, yet doesn’t pay a dividend.
BIIB has a mere 219-million-share float. Interestingly, paying $657 million in dividends would only amount to under 22% of free cash flow, and result in a 1.3% yield.
Should-Be Dividend Stocks: Facebook Inc (FB)
It’s probably time for Facebook Inc (FB) to pay a dividend as well.
There is some uncertainty with FB, considering that almost all of its revenue comes from advertising. If behavior changes, FB could find that it isn’t long for this world.
Still, it seems to have entrenched itself pretty firmly in the social media universe.
Net income continues to grow around 20%. Operational cash flow really took off in FY15, at $8.6 billion. However, capex is also growing, leaving free cash flow of $6.06 billion. That’s plenty, especially considering the $20.6 billion war chest of cash it has, with no debt.
Now, it is fair to say that FB may need to spend money to acquire businesses, and those businesses may need to ramp up to produce cash flow.
Still a modest payment of $1 per share would result in $2.31 billion in dividends being paid, or about 38% of free cash flow. It wouldn’t quite be a 1% yield, but it would be a start.
As of this writing, Lawrence Meyers has no position in any stock mentioned.