5 Stocks That Should Start Paying Dividends

By Kiplinger's Personal Finance Magazine

Investors tend to be drawn to hot technology and biotechnology stocks for their growth prospects – not for the cash they return to shareholders. But several well-known tech and biotech stocks could afford to invest in their businesses, buy back their shares and pay dividends, if only they chose to.

When it comes to returning cash to shareholders, corporate management often prefers stock buybacks to dividends because it gives them flexibility. A company can adjust its share repurchases according to business and market conditions. A dividend is a commitment. The market often exacts severe and swift revenge if a company cuts or suspends its payout.

The initiation of a dividend can also be taken as a sign that a company or stock’s best days are behind it. A quick look at Apple’s (AAPL) performance shows that’s not necessarily the case. The company reinstated its dividend in 2012 after a 17-year hiatus. Between price appreciation and payouts, Apple stock has delivered a total return of about 170% since March 2012, when it announced plans to reinstate its dividend later that year – the Standard & Poor’s 500-stock index is up about 130% over the same span, including dividends.

The following five stocks don’t yet offer dividends, but they should … and could. Each has the cash-generation ability to start a regular payout without giving up on share repurchases and investments in future growth.

Adobe Systems

Market value: $124 billion

Analysts’ opinion: 15 strong buy, 1 buy, 7 hold, 0 sell, 0 strong sell

Adobe Systems (ADBE, $253.28) has long been dominant in its niche of providing software for designers and other creative types. Photoshop, Premiere Pro for video editing and Dreamweaver for website design are just some of its hit products, and its shift to delivering them through cloud-based subscription services is generating tremendous growth.

Revenue is forecast to rise 22% this year and 19% next year, according to a survey of analysts by Thomson Reuters. Earnings are expected to increase at an average annual clip of 24% for the next half-decade.

Investors aren’t clamoring for a dividend with that sort of torrid growth on the horizon. And it’s not like Adobe isn’t returning cash to shareholders already. It spent $1.6 billion on stock buybacks over the 12 months ended June 1, according to S&P Global Market Intelligence.But it could afford to give them more.

Even after share repurchases and interest payments on debt, Adobe generated free cash flow – the mother’s milk of dividends – of $2.6 billion during the 12 months ended June 1.

Alphabet

Market value: $861.4 billion

Analysts’ opinion: 24 strong buy, 4 buy, 2 hold, 0 sell, 0 strong sell

Alphabet (GOOGL, $1,238.16), the corporate parent of Google, is another technology giant with such outsize growth prospects that it can get away with no paying a dividend.

But the fact the remains that it easily could – even after European regulators hit it with a record $5 billion antitrust fine.

The search giant’s revenue is forecast to increase 23% this year and 19% next year, according to Thomson Reuters data. Earnings are expected to increase at an average annual rate of 18% for the next five years.

Alphabet is plowing investments into the next big things. It has artificial intelligence, machine learning and virtual reality in its sights, and it’s already a major player in cloud-based services. But it’s still swimming in cash.

The company had $102 billion in cash and short-term investments as of June 30 and just $3.9 billion in long-term debt, according to S&P Global Market Intelligence. Alphabet bought back $6.3 billion of its own shares over the 12 months ended June 30, and still generated $22 billion in free cash flow, so it clearly has the financial means to initiate a dividend without risking its R&D.

Biogen

Market value: $69.0 billion

Analysts’ opinion: 17 strong buy, 1 buy, 7 hold, 0 sell, 0 strong sell

It might be time for Biogen (BIIB, $344.21) to start paying a dividend.

It wouldn’t be the first big biotechnology stock with slower growth prospects to do so. After all, peers such as Amgen (AMGN) and Gilead Sciences (GILD) pay dividends with yields of 2.7% and 2.9%, respectively.

A dividend also could help smooth out some of the volatility that BIIB investors have had to deal with. Mixed results from a mid-stage clinical trial of Biogen’s promising Alzheimer’s drug made July a month to remember. Biogen rose more than 30% between June 29 and July 25 … but they’re down by double digits ever since.

Expected top-line growth isn’t as explosive as Alphabet and Adobe, at just 7% this year and 3% next year. Annual long-term earnings growth is promising, though, at nearly 8%, according to Thomson Reuters.

Biogen bought back $3 billion of its own stock over the 12 months ended June 30, while generating $3.9 billion in free cash flow even after paying interest on debt. Biogen certainly can afford to return more cash to shareholders.

Booking Holdings

Market value: $98.4 billion

Analysts’ opinion: 15 strong buy, 4 buy, 8 hold, 0 sell, 0 strong sell

Booking Holdings (BKNG, $2,029.71), the online travel website operator formerly known as Priceline.com, has sturdy growth prospects, but it’s not like they’re accelerating anymore.

Analysts expect earnings to increase at an average annual rate of 14.7% for the next five years. That compares with average annual earnings growth of 15.6% over the past five years – in other words, good, but slowing down. Revenue is forecast to rise 19% this year and 12% in 2019.

Booking’s strategy of growth through acquisitions and investments hasn’t precluded it from buying back its own stock – or generating ample free cash flow. The company repurchased $2.3 billion in BKNG shares in the 12 months ended March 31. It also generated $3.4 billion in free cash flow after paying interest on debt.

Booking’s shareholders aren’t clamoring for a dividend, but it absolutely could afford to initiate one. That would ensure a little extra total return and perhaps tamp down what historically has been a relatively volatile stock.

Facebook

Market value: $515.9 billion

Analysts’ opinion: 25 strong buy, 3 buy, 2 hold, 0 sell, 0 strong sell

Facebook (FB, $177.78) set a record for the most market value wiped out in a single trading session when the stock lost 19%, or $120 billion, on July 26. That came on fears that it has entered a new era of slower revenue growth and narrower profit margins. Shares have drifted lower ever since.

Earnings that have grown at an average annual rate of 64% for the past five years are now expected to rise “only” 21% a year for the next half-decade. Revenue is forecast to increase 37% this year, but “just” 25% next year.

If Facebook’s days of outrageous growth (relatively speaking) really are over, one thing it could do to sweeten the pot for its stock is to start paying a dividend. It has more than enough firepower to do so and still pour resources into acquisitions, research and development.

Facebook had $42.3 billion in cash and short-term investments as of June 30 – and no long-term debt against it. It bought back $6.7 billion of its own stock during the 12 months ended June 30, while generating $11.3 billion in free cash flow. Returning some more of that cash to shareholders could go a long way toward rebuilding faith in Facebook stock.

This article provided by NewsEdge.