Prediction: Amazon will NOT become the market’s next dividend stock, and here’s why

The fact that Amazon (AMZN -0.27%) not yet a dividend stock may come as a surprise to some investors. It is one of the largest publicly traded companies in the world and boasts one of the most stable balance sheets.

After years of not returning cash to shareholders, even tech giants like parent Google Alphabet and Meta platforms initiated payments in 2024. However, despite the pressure that the examples of Alphabet and Meta could put on Amazon, it is unlikely to follow suit. Here’s why.

Can Amazon afford a dividend?

At first glance, the lack of a dividend may seem surprising. Amazon’s market value is around $2 trillion. That makes it the fourth-largest publicly traded company as measured by market capitalization, and the largest that does not return cash to shareholders.

Furthermore, investors tend to view dividends as a sign of a company’s strength and stability, as it must sustain relatively constant positive cash flows to maintain a payout. From a cash perspective, Amazon’s balance sheet indicates it could support a significant dividend. At the end of the second quarter of 2024, Amazon had $89 billion in cash. The company also generated $53 billion in free cash flow over the past 12 months.

Free cash flow is what remains after the company invests in capital improvements. So even when considering Amazon’s $55 billion in long-term debt, there’s little Amazon can’t afford, including paying a dividend.

Why a dividend isn’t likely anytime soon

Despite its high degree of financial flexibility, Amazon shareholders should not expect it to follow in the footsteps of Alphabet and Meta by offering a dividend. The likely reason is Amazon’s apparent belief that it can use cash better than its shareholders.

A surprising indicator that shows the low probability of paying dividends is the number of shares of the company. Amazon has an outstanding number of about 10.5 billion, and despite considerable liquidity, this number has RISEN by 6% in the last five years.

That pace of stock growth is unlikely to undercut its shareholders. Still, the apparent need to dilute shareholders is puzzling given Amazon’s liquidity.

Amazon’s stock buyback program can only add to this confusion. The company authorized a $10 billion share buyback program in March 2022. However, as of mid-2024, it has only spent $3.9 billion of that on buybacks, meaning it remains a net issuer of actions.

To be fair to Amazon, though, not all megacaps believe in dividends. The most prominent opponent of dividend payments is Warren Buffett. Apart from a brief experiment with dividends in 1967, Berkshire Hathaway did not offer payments.

However, unlike Amazon, Berkshire Hathaway is a big proponent of share buybacks and has periodically bought back A shares in the first half of 2024 and earlier. Since Amazon hasn’t commented extensively on the matter, we have to assume it shares Buffett’s philosophy on how to use excess cash.

Amazon and the prospect of a dividend

Although it looks like Amazon should pay dividends, investors should not consider such a move likely.

Despite achieving a high level of financial stability, Amazon continues to partially finance its expansion plans by issuing shares. It also chose not to take full advantage of its share buyback program, meaning the number of outstanding shares continues to grow.

So until Amazon’s management changes its dividend philosophy, investors who want cash from owning Amazon will likely have to sell shares.