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BIG TECH STOCKS: SHOULD YOU BUY?

christopher.wiesler



On June 7th, Nvidia announced a stock split, lowering the share price to around $100, enabling easier smaller trades. But this, according to the Economist, is undeniably cause to ‘pop the champagne’. For such a split to even be necessary in the first place, the share price ‘must have multiplied’, and as such would be divided by the same factor. Nvidia has diluted its stock price by a factor of 10. Just two years ago Alphabet and Amazon split each share into 20. 


Dividends used to be a popular measure of analysing potential returns. In contrast, Amazon has never released a single dividend, due to its focus on repaying debt along with capital expenditure, versus shareholder returns. Meta made its first dividend in February at 50 cents a share, Alphabet will make its first ever dividend on June 17th with 20 cents per share, while Nvidia has not raised its quarterly 1 cent per share dividend since 2018, a paltry yield of 0.02%, according to the Straits Times. 


But will such low yields mean dividends will rise or that future returns will be lacking? The Straits Times points to the increased spending on buybacks by the Magnificent 7 big tech stocks, which shot up to almost US$58.5bn on buybacks this year, versus just US$11bn on dividends. The 50-cent Meta dividend came in tandem with a US$50bn buyback. Alphabet’s will come with a US$70bn repurchase authorisation. Finally, Apple announced the ‘largest buyback in US history’ of US$110bn, breaking its own record of US$100bn. Certainly, this could be interpreted as a clear signal for higher dividend yields. 


However, these dividends are truly only meaningful if the yield increases and payouts now are comparatively small- but the compounding effect must not be understated. Microsoft saw a yield of 0.7%, but across the past 20 years, shares climbed 1500%, a whopping 2400% if dividends are included. Historically, though, this has usually portended poor returns, but in the cases of Apple, Alphabet and Nvidia, buying recently would make one ‘a lot richer than fretting over valuations’. 


Economists Andrew Atkeson, Jonathan Heathcote and Fabrizio Perri, have offered a rather radical take on the matter. In a working paper, they argue the change in the prices and dividends of a broad share index across 1929-2023 can be explained ‘purely by a model of expected future dividends’, and its ratio to aggregate consumption. Essentially, their notion is that ‘prices move only when investors receive news that changes their expectation of future payouts’, otherwise displaying ‘impeccable restraint’.


On the contrary, it could certainly be stated that prices move for ‘all sorts of other reasons too’. A stock’s value is the sum of its expected future cash flows, states the Economist, discounted by a ‘myriad’ of factors including the uncertainty of the expectation, the cost of capital, investors’ risk appetites, and more. Changes to any of these will also impact stock prices. If risk appetite is high, investors are more willing to invest in lower-yield stocks and so stock prices may be high relative to expected payouts, without any change in the latter.


A landmark paper in 2011 by John Cochrane, then of the University of Chicago, concluded that it is not the expected dividends, but purely the discount factors influencing stock prices. However, the three opposing economists do not present an ‘effective challenge’, instead constructing a model relating prices to dividends, with a residual third variable serving as ‘expected dividends’. However, this could just as easily be labelled risk appetite’ and disprove their claims. 


As for today’s ‘low-yielding superstar stocks’, there is a ‘tempting’ belief that the ‘old valuations no longer apply’ and that ‘today’s forecasts are simply better than yesterday’s’. However, the Economist also raises the possibility that the change may be simply ‘dividends going out of fashion’. 


As such, earnings may serve as a ‘better proxy for returns’ as they enable investors to gain in other manners, via the aforementioned buybacks which generate heady capital gains. Such firms are not as ‘eye-wateringly expensive’ but are certainly not cheap either. It remains to be seen whether investors are ‘correctly predicting barnstorming growth ahead’, or more likely ‘falling into the trap of “this time is different”’.



Author: Kendrick Low

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