While selecting a dividend paying stock, one of the key measures is the sustainability of
its dividend payout. When a part of a company's net profits is distributed to shareholders as
dividends gets too high for a long period of time, it could be a not-so-good move. When the
payout ratio of dividends becomes too high, it simply means that the company is not retaining
much profits, which could pose a trouble in the future in case a need for cash arises.
Eventually, sooner or later, it will be forced to reduce or suspend the payout.
Another great measure of a good dividend stock is whether the company is growing its base customer
base. This suggests the company’s growth is not stagnant and customer growth is still there.
It also helps the company to directly increase its revenue and net earnings over the long run.
This in turn helps the company to maintain its dividend payouts
and maybe even increase its dividends along with retaining much of the profits.
Amazon.com Inc (NASDAQ:AMZN) is the world’s largest e-commerce company, incorporated by
Jeff Bezos in 1994. Originally, Amazon was only a bookseller and intended to deliver books to
readers anywhere. Today, after almost 25 years, Amazon is not just a bookseller, it has also
become a global technology giant. It provides services such as online video streaming, Simple
Storage Services (S3), which rents data storage over the internet, Amazon Web Services (AWS), etc.
Despite being a trillion-dollar company, the company adopts a no-dividend policy. Currently,
Amazon does not pay dividends to its shareholders.
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Why does Amazon not pay dividends?
As already mentioned, dividend-paying stocks generally pay dividends out of their net earnings.
Companies have several options when deciding what to do with their net
earnings. By no means Amazon could be termed as a value stock, as valuations of
almost all FAANG stocks are up through the roof. But these companies top the
list of growth-oriented businesses. The top priority of Amazon is to invest in its growth.
Investing for the future is something that Amazon has been doing for the last two decades and is
quite aggressive at that. Amazon's total net income for FY20 was recorded at over
US$43 billion. During that same period, Amazon spent US$59 billion on property, plants,
and equipment, more commonly referred to as capital investments. In other words,
instead of keeping a portion of net earnings for the future, Amazon is going one step
further and spending more than its earnings on its growth. Amazon is so focussed on its
expansion plans that it dipped into its savings (after exhausting net earnings) to finance
for these growth opportunities. These investments are reaping benefits, making one of the handful
companies in the world to have a market capitalisation of over a trillion dollars.
Amazon is doing well to fund these expansion efforts with
much of external sources. The company has been able to increase its earnings per share
at a compound annual rate (CAGR) of 32.4% over the last decade.
Despite such a rapid and consistent growth, the net debt rate is only about US$3.15 billion, and
it could be managed easily considering Amazon's gross revenue in FY20 was about US$386 billion.
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So when does Amazon will pay dividends?
As long as the expansion opportunities are lucrative,
Amazon’s management would continue to reinvest the company’s earnings for the growth. Eventually,
though, with this rapid growth, there would come a point where total earnings are consistently more
than the further growth opportunities it can find to allocate its earnings.
This often is referred to as a stage of maturity in a business cycle, then the management might
decide to start considering rewarding shareholders by paying out dividends.
Interestingly, the longer it takes for Amazon to reach this point, the better it may be
for shareholders looking for dividends. That would mean by the time Amazon
reaches a plateau, it would have already utilised
much of the growth opportunities and it can lead to bigger and more sustainable dividends payouts.
Currently, Amazon may not be a dividend stock,
however, it has strong potential to become one in the future.