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No dividends? Company is still growing? No problem.
In the previous article, we touched on the benefits of purchasing stocks (ie Coca- Cola) at their earlier stage and how investors can reap the rewards of higher dividend yields if they bought into the companies at lower prices.
Coca-Cola has long been dubbed as “Dividend Investor’s Dream” company since they have been increasing their dividends for 59 years consecutively, which is great news for their investors, especially the ones who bought into them at earlier days.
Because large and stable companies like Coca-Cola are no longer in the hyper-growth stage (since they now own at least half of the world’s carbonated beverage market share. In most parts of the world, a customer can purchase a can of Coke in every 100 meter radius they travel to), they will reward shareholders in forms of dividends or share buybacks.
Will buying into companies that do not pay dividends provide attractive returns for shareholders in the long-run?
That depends.
For companies which are still in the growth stage, it may make more sense for them to reinvest their earnings back into their businesses (be it through R&D or Marketing expenses) to continue to either sustain or extend their level of growth to capture more market share.
Hence choosing to distribute those excess earnings as dividends to shareholders will come as an opportunity cost for their growth trajectory instead,
Also since dividends are taxable by both the corporation and the receiving shareholders- which may not be favorable to both parties in the long run.
So if the company is still in growth stage, meaning:
1. If their Revenue growth rate is higher than their peers, or
2. If their Revenue is growing higher than the Market size growth rate:
Then it is sensible for the company to not pay out any dividends during this period of time.
As you can see for Amazon, they are increasing both their R&D and Marketing expenses along the years, while experiencing a healthy trend of Revenue growth along the years.
This is a clear sign that they are continuing to grow and capture more market share of the segments they are operating in.
Coca-Cola on the other hand, are showing to have decreasing revenue in the past decade, yet they are continuing to increase their advertising expenses. This could indicate that there is less demand for their products and Coca-Cola has to spend more money just to maintain their market share presence.
Investing in growth companies with long runways.
Using Amazon as an example:
Here are the outcomes of various scenarios if you invested in Amazon in their earlier days.
Assuming if you have invested a one-off capital of $1,000 in Amazon when:
i. When they got listed:
Your $1,000 will have yield you a total capital gain of $2,000,000 in 24 years’ time.
That is equivalent to about $83,537 of gains per year although your total investment capital is only $1,000.
ii. Bought at their all-time high price during the dot-com bubble:
What if you were unlucky, and bought into them at their all-time high price of $91.40 during the dot-com bubble on the 14 Jan 1999.
Although the price would have been moving sideways for the next 10 years:
If you held on to the stock until May 2021, it would have still generated a 37x returns in the span of 22 years,
And give you a total gain of up to $37,000.
That is still an impressive annual return of 18% per year.
iia. Bought at their all-time high price during the dot-com bubble and dollar-cost-averaged every year for the next decade when the stock was moving sideways.
However, if you would have continued dollar-cost averaging on the stock all these years while it was moving sideways and stopped once it reaches the same price level you first bought it at, you would have brought down your average buying price to $54.42 and gained even higher returns.
Doing so, you would have generated a 62.7x returns in the span of 22 years, averaging you a yearly 20% returns.
Key takeaways
Investors ought not to be discouraged by investing in stocks that do not pay dividends as long as they are still in the growth stage.
Like most companies, once they have reached the maturity stage and their growth rate start slowing down, they will start returning the excess cashflows generated from the business back to shareholders through share buybacks or dividend playouts (for example Microsoft).
And being one of the earlier shareholders, you would be rewarded with higher dividend yields because of the lower price you bought the stock at.
Second, during periods of market volatility, instead of panicking and selling your investments when their prices fall precipitously, take the opportunity to dollar-cost-average to reduce your average price and hold for the long-term instead.
Of course there are times when you should not continue to dollar cost averaging on a stock when it’s price plummets: ie when the fundamentals are no longer good or that the company is showing some redflags.
Please note that the iia example above is for illustrative purpose only. As from 1999 to 2009, Amazon’s fundamental might have worsened and it would have been both unwise and risky to continue dollar-cost-averaging on an investment when that happens.
Endnotes:
CocaCola - 57 Year Dividend History: KO. Macrotrends. (n.d.). https://www.macrotrends.net/stocks/charts/KO/cocacola/dividend-yield-history.
Amazon's competitors from craft.co https://craft.co/amazon/competitors
Sabanoglu, T. (2021, March 26). Global retail e-commerce market size 2014-2023. Statista. https://www.statista.com/statistics/379046/worldwide-retail-e-commerce-sales/.
Amazon Financial Statements 2005-2021: AMZN. Macrotrends. (n.d.). https://www.macrotrends.net/stocks/charts/AMZN/amazon/financial-statements.
CocaCola Financial Statements 2005-2021: KO. Macrotrends. (n.d.). https://www.macrotrends.net/stocks/charts/KO/cocacola/financial-statements.
NYSE: KOCoca Cola Co Statistics & Facts. WallstreetZen. (2021, June 12). https://www.wallstreetzen.com/stocks/us/nyse/ko/statistics.
Amazon Interactive Stock Chart (AMZN). Investing.com. (n.d.). https://www.investing.com/equities/amazon-com-inc-chart.
Harley Schwadron. (n.d.). 'I've written a love song about big dividend - playing stocks.'.
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