(BFM Bourse) – It is not uncommon for companies to refuse to pay a coupon to their shareholders, believing that value creation requires investment. However, this does not prevent them from carrying out share buybacks.
This is an epinal image that is far from accurate. A company that does not pay a dividend and therefore does not remunerate its shareholders, does not have confidence in the future and is not robust. This amounts to forgetting that many companies do not pay a coupon to their shareholders. And not for one-off problems (we can think of the suspension of the dividend during the health crisis) but by choice.
This is the case of Alphabet, the parent company of Google, which has never paid a dividend since its entry on the New York Stock Exchange (at the time the action was still traded under the name “Google “), in 2004. Same thing for Meta (parent company of Facebook) since its IPO in 2012, and Amazon, whose arrival on the market dates back to…1997. In reality, there are dozens or even hundreds of companies in this situation (the site dividende.com lists just under a hundred on the S&P 500).
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Finance growth
Why not pay dividends? Quite simply because even though some of these companies have the means to pay a coupon (this is the case of Alphabet), they consider that the shareholders are above all remunerated by the rise in the price. These companies prefer above all to devote their cash to strategic investments, such as development in a promising new country, R&D, new products, or the takeover of other companies.
“The dividend remains above all a question of the allocation of new equity created by the generation of results. The problem for companies is to know whether they have investment opportunities that yield at least the cost of capital. If so, they can do without paying a dividend, if not they might as well pay one rather than invest badly”, explains Pascal Quiry, professor of finance at HEC and co-author of Vernimmen.
With this in mind, it should not be surprising that “tech” companies refuse to pay a coupon. “Companies in the technology sector are experiencing significant growth rates and therefore need to allocate equity to generate growth, both internally and externally”, underlines the academic. “Alphabet, for example, bought Youtube which was a success, just like Meta (Facebook) had the intelligence to acquire Whatsapp and Instagram,” he continues.
React in the event of a storm
The only example within the CAC 40 is telling: only one company in the Parisian index does not pay a dividend, and has done so since its IPO in 2014: the payments group Worldline. However, Worldline is operating in a fast-growing sector (particularly with the gradual end of cash payments) in which many opportunities must be seized.
The group explained this very well in a written response to a question from a shareholder at its last general meeting. The payment of a coupon is only an objective “to the extent that it is compatible with the implementation of the group’s external growth policy”, Worldline then indicated. “For the moment, the board of directors considers that the group must continue to play an active role in the consolidation of the payments market and continue to make value-creating acquisitions,” the company continued.
Another particularity for tech groups, notes Pascal Quiry: “a new player can one day create a product which marks a total break. For example, with its creation, Google had disrupted the landscape of online search, the previous great actor was AlltheWeb.com.”
“The day this risk materializes, these groups want to have cash immediately available to react, invest or buy companies. This can take a few days,” he explains.
The example of Apple
Let us recall in passing that the payment of the dividend, according to financial theory, does not enrich the shareholder since the dividend is detached from the share upon payment. So in theory the wearer receives in one pocket what he loses in the other.
This is also one of the arguments put forward by Steve Jobs, the famous former CEO of Apple. Under his leadership, the apple group did not pay a dividend (in reality from 1995, shortly before he took power, until his death in 2012).
The iPhone designer insisted that the dividend policy does not increase the value of a company, as reported by Bloomberg. “What would you rather us be? A company with our stock price and $40 billion in the bank? Or a company with the same stock price and no cash in the bank?” he declared in 2010, according to the American press agency.
Warren Buffett himself has always refused to pay a dividend with his company Berkshire Hathaway. The most famous investor in the world delivered a long argument, in his 2012 letter to shareholders, to explain – in summary – that he preferred investments to dividend payments to create value.
But, like Alphabet, Amazon or Meta, Warren Buffett on the other hand uses share buyback programs, which he appreciates, judging that they can create value if they are executed correctly at the right price.
“Share buybacks have significant flexibility for these companies because they can be stopped at any time, without consequence, and do not constitute a commitment, unlike a dividend policy,” explains Pascal Quiry.
Furthermore, companies can very well change gear. After the death of Steve Jobs, his successor Tim Cook decided to reinstate the payment of a coupon. As explained by Los Angeles Timesthe current boss of Apple was more attentive to investors who were pleading to finally have a return to the shareholder while Steve Jobs rather perceived the market as a necessary evil.
“The whole debate at the end of the 2000s and beginning of the 2010s was that Apple was hoarding billions of dollars – around 150 billion – and it was a waste. Because we knew that the group would never carry out major acquisitions. As their growth slowed down, they ended up paying a dividend which was the right decision”, underlines Pascal Quiry.
Julien Marion – ©2023 BFM Bourse
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