Why do Some companies decide not to pay dividends.

 

It is common for dividends to be discussed in the context of public listed corporations. It is a way of returning cash to investors comparable to share buyouts. Some companies choose not to pay an extra dividend or to repurchase a single share of stock, which has sparked intense debate. The quantity of money a company has on hand or its exceptional liquidity ratios have a significant impact on the cost of capital to stakeholders.

Why Do Some Corporations Decide Not to Pay Dividends?

Businesses that develop quickly often do not pay dividends during critical growth times, since reinvesting the money in operations is more cost-effective than paying the dividend. Even well-established companies, on the other hand, often reinvest their profits to promote new ventures, pay off debt, or acquire other enterprises. All of these measures have the effect of raising stock values.

Tax-wise, shareholders benefit more from the choice not to pay dividends. Non-dividends, in particular, are taxed as ordinary income to shareholders, which means that the dividend tax rate is the same as the investor's marginal tax rate unless the shareholder qualifies for a special exemption.

                                      

Historically, the following significant technological businesses have refused to pay dividends:

 Alphabet Inc (GOOG)                                           

                                                                                                

Amazon.com (AMZN)

 Meta (FB), originally known as Facebook

 

Here are a variety of reasons why a company may choose to pay a dividend. Implementing dividend distributions not only improves investor sentiment by rewarding loyal investors with dividend income, but it also adds a new and significant group of institutional shareholders who manage income-oriented funds.

Meta Didn’t Pay Dividends

Income investors who would not have otherwise invested in a non-dividend producing company such as Meta Platform are lured to do so by the prospect of a dividend payout. Furthermore, the company's fundamentals seem to be strong enough to support a dividend distribution, especially considering how profitable it is. As projected by the consensus expert prediction, Meta Platforms is expected to earn $13.96 per share in the financial year 2021. The firm may be able to pay a significant dividend while still having sufficient cash flow to invest in growth initiatives.

      Source -Osiris

If Meta Platforms maintained a yearly payout ratio of 25 % on earnings per share, the company could declare an annual dividend payment distribution of $3.49 per share. Depending on the most recent share price, this would suggest a dividend yield of 1 percent on the stock. Despite the fact that Meta Platforms does not pay a big dividend, investors should not expect huge returns from the technology business. In contrast, 1 % of dividend yield would give Meta Platforms a yield that is comparable to that of other dividend-paying IT behemoths such as Apple Inc. and Microsoft Corporation

Furthermore, with a beginning payout ratio of fewer than 25% and its future EPS growth potential, Meta Platforms might increase its dividend rapidly each year. A dividend would have little influence on the company's financial condition since Meta Platforms concluded the third quarter of 2021 with $58.08 billion in cash, marketable securities, and cash equivalents. Meta has a current ratio of 4.2, which is quite high and shows that it has more than adequate short-term liquidity. By practically every indicator, Meta Platforms has massive financial resources and considerable liquidity, more than enough to transfer a portion of its cash flow to investors without endangering its current financial state or future expansion. The most common reason a firm decides not to pay a dividend to its shareholders is that it lacks financial power. Small businesses at a high-growth stage and cyclical businesses with uneven profitability must save cash flow as necessary.

On the other hand, Meta is certainly no longer from its early stages. It is a huge corporation with a high cash flow. It also has a massive cash balance on its fortress balance sheet. Fundamentally, Meta Platforms has no incentive not to pay a dividend. It has more than enough capital for expansion investments. Dividends have been more common in the IT business in recent years. Although Meta presently does not pay a dividend, stockholders should not be surprised if one is issued in the future.