Tech companies most likely to start dividends after Meta, Alphabet

As the technology and streaming industries mature, so too are companies' capital allocation strategies.

For decades, tech stocks and investors prioritized growth over stable shareholder returns. Cash was spent on innovation, M&A and occasionally on share buybacks. Streaming companies were similar, growing subscribers and content libraries at all costs. Walt Disney Co., for instance, famously suspended its dividend in 2020 after activist investor Third Point called for the move, arguing investors valued more a dollar invested in streaming than a dollar in their pocket.

However, rising interest rates and slowing growth projections are causing companies and investors to embrace efficient operations and cash returns. Disney reinstated its dividend at the end of 2023. Meta Platforms Inc.'s board announced in February that it would initiate a cash dividend, its first ever, in tandem with a $50 billion share buyback. A couple of weeks later, Salesforce Inc. followed suit with its dividend announcement. In April, Alphabet Inc. said it, too, would pay a dividend and launch a $70 billion buyback program. All told, S&P Global Dividend Forecasting estimates that dividend initiations and reinstatements for the S&P 500 constituents will reach a record in 2024, with such strong momentum not seen since at least Apple Inc.'s dividend reinstatement in 2012.

"Providing a dividend is a way for these profitable tech companies to prove to the market and their shareholder base that they can provide sustained regular shareholder return on a regular and predictable basis," Dividend Research Analyst Juan Pablo Albornoz told S&P Global Market Intelligence.

Presently, 96 companies in the S&P 500 Index do not pay dividends. About half of those are in the technology, media and telecom sectors, according to S&P Global Dividend Forecasting.

As to which tech or streaming company might be the next to initiate a dividend, S&P Global Dividend Forecasting sees Netflix Inc. as a top candidate.

Albornoz noted that Netflix is the most profitable company in the streaming space and its capital allocation framework is already oriented toward shareholder returns, such as share repurchases. In addition, peers such as Disney, Paramount Global and Fox Corp. already pay dividends.

In the tech space, Adobe Inc. is likely to initiate dividends in the next two years, according to Albornoz.

"Adobe's management seems to be balanced in between growing the business both organically and inorganically and driving shareholder return. In the last five full fiscal years, Adobe returned 85% of its levered [free cash flow] to shareholders via net share repurchases," Albornoz said.

Adobe's program manager of investor relations said on a call with analysts back in 2021 that initiating a dividend is "something that we want to do potentially," adding the company would need to be confident that it can continue to grow the dividend over time. The momentum around dividend initiations in tech adds further pressure on Adobe to start regular shareholder payouts.

ServiceNow Inc., an enterprise software provider, is another tech company that will likely start dividends, according to Albornoz. ServiceNow has a strong top-line performance and generates solid free cash flows, while closest peer Salesforce has already started dividends.

In the AI hardware space, one key contender expected to start dividends is Arista Networks Inc., which sells networking equipment. Albornoz said the company has large insider ownership, which benefits from dividends, and its peers already pay dividends. Arista's revenue nearly doubled in two years, while free cash flow is at record levels.

Cloud computing company Akamai Technologies Inc. and online dating app owner Match Group Inc. are also likely to initiate dividends. Both Akamai and Match are among the highest-ranked in Dividend Forecasting's quantamental scoring system, which uses qualitative and quantitative factors to determine the possibility of initiating dividends.