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Should Amazon Start Paying a Dividend?

E-commerce giant Amazon.com (NASDAQ: AMZN) is swimming in revenue and cash profits this year. To be clear, that's not a new trend. The COVID-19 pandemic simply accelerated Amazon's impressive growth even further.

Companies with both $30 billion of cash on hand and generous free cash flow are often expected to send some of that cash back to shareholders. Amazon isn't paying dividends right now, but that policy isn't written in stone. Should Amazon set some of its torrential cash flow aside for a brand new dividend policy?

Image source: Getty Images.

What if Amazon paid dividends just like Microsoft or Apple?

Amazon would be following in the footsteps of some impressive colleagues if it started to pay dividends. Only two companies on the American stock markets can boast larger market caps than Amazon's $1.57 trillion, and both of them are technology giants with well-respected dividend payouts. Microsoft (NASDAQ: MSFT) kicked off its dividend policy in 2003 and currently offers a 1.1% dividend yield, while Apple (NASDAQ: AAPL) got into the dividend game in 2012 and carries a 0.7% yield today.

These companies spend a significant amount of money on their dividend policies. Microsoft scooped out $15.5 billion from its $49.2 billion of free cash flow in order to finance its dividend payouts over the last four quarters. Apple poured $14.1 billion into the dividend bucket, culled from $73.4 billion in free cash flow.

Let's imagine that Amazon copied Apple's dividend strategy. Reserving 19.2% of its free cash flow for dividend checks, Amazon would spend $4.7 billion a year to finance a quarterly payout of roughly $2.36 per share. That may sound like a lot, but it works out to an effective yield of just 0.3%, since Amazon's stock is trading at nearly $3,200 per share.

Copying Microsoft's deeper commitment to dividends would result in Amazon earmarking 31.5% of its cash flows for dividend purposes. That's $7.8 billion, enough for a quarterly dividend of $3.87 per share. The effective yield would rise to 0.5%. Better, but still not terribly impressive.

Image source: Getty Images.

Don't hold your breath waiting for an Amazon dividend

The thought exercise above is interesting but not very realistic. Amazon founder and CEO Jeff Bezos is well-known for his intense focus on maximum growth. Every day at Amazon is supposed to feel like "Day One" at a rising start-up business.

"Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death," Bezos wrote in a letter to shareholders in 2017. "An established company might harvest Day 2 for decades, but the final result would still come."

Even a small dividend budget would take resources away from that central idea. The day might come where Amazon runs out of high-octane growth prospects and is forced to shift down into the slow but inevitable decline that Bezos describes. That day is not today or any day in the foreseeable future. I would be shocked to see Amazon initiating a dividend policy within the next decade or two.

If you're looking for a massive cash machine in the tech sector that can power a solid dividend payout for decades to come, feel free to consider Apple or Microsoft. Amazon won't join that club anytime soon.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Anders Bylund owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon, Apple, and Microsoft and recommends the following options: long January 2021 $85 calls on Microsoft, short January 2021 $115 calls on Microsoft, short January 2022 $1940 calls on Amazon, and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.


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