Partner Insight: The Dividend Signal

Investment Week

Hot on the heels of Meta Platforms, tech giant Alphabet has joined the dividend game. Both companies’ join Microsoft, Apple and Nvidia as ‘big tech’ dividend payers. Beneath the surface more tech dividends are emerging, with Salesforce and Booking.com having their dividend debuts in 2024. This is a significant development for a space with a long-held preference for buybacks.

The big tech payers are expected to pay out $53bn in dividends over the next year. This figure is close to the $60bn expected from the FTSE 100 index in aggregate – a remarkable statistic given the FTSE’s historic reputation for income.

Nevertheless, the dividend figure is dwarfed by the level of buybacks. The group is authorized to repurchase $315bn of stock this year, almost five times the dividend payout. Clearly, the preference for buybacks remains. However, the trend towards dividends still serves as an important signal for investors.

Maturity hypothesis

Classic theory proposes that dividends convey positive news on a company’s future cash flows. The theory is supported by the positive long-run relationship between dividend growth and share price performance.

Similarly, academia supports the “maturity hypothesis”. The premise is that dividends are a signal of a company’s maturing financial profile, evidenced by a decline in the level of risk and increasing free cashflow generation. The perception of lower risk is positive for the firm’s cost of capital, and the stock is typically rewarded with a higher earnings multiple.

With the tech sector, media attention suggests it is more likely the latter. The headlines of Meta’s ‘coming of age moment’ come after a period of streamlined operations, tight expense control and new focus on shareholder-friendly returns. The dividend initiation is a signal that this discipline is here to stay, and that Meta, like others in the tech space, is entering a new stage in its corporate life.

Maturing financial profiles bring scope for equity retiral and the ability to substantially raise payout ratios. In the Aegon Global Equity Income fund, part of our tactical allocation is to look for these stories which we group into “De-equitiser” and “Hoarder” buckets*.

United Rentals

United Rentals is a recent example of this dynamic. The company is the largest equipment rental firm in the US. Its business model is simple: buy construction equipment, rent it out and later sell it on. Drive past any plant hire yard and you will likely be underwhelmed, but these

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