Amazon's Ability And Intent To Pay A Dividend

Jul. 4.14 | About: Amazon.com, Inc. (AMZN)

Summary

Amazon currently pays no dividend, but the author runs various scenarios for a potential dividend.

Because the company has a rapidly changing business model, a dividend in 2014 or 2015 is unlikely.

The company focuses on growth in free cash flow per share, and management is focused on improving the customer experience, not the shareholder dividend yield.

The scope of this article will look at the financial health of Amazon (NASDAQ:AMZN), and its ability to pay a dividend.

How Much of A Dividend?

FY 2013 Cash flow summary ($ in millions)

FYE 13

FYE 12

FYE 11

Cash from operations

$5,475

$4,180

$3,903

Capex

($3,444)

($3,785)

($1,811)

Acquisitions, net of cash

($312)

($745)

($705)

Dividends

0

0

0

Shares repurchased

0

($960)

($277)

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The company had cash and equivalents of $8.7 billion at 12/31/13.

For the most recent year, AMZN generated $1,719 million in adjusted free cash flow, or cash from operations minus capex minus the cost of acquisitions. The dividend coverage ratio is the free cash flow over the dividend.

Now, as a dividend investor, I prefer to see a dividend coverage ratio of greater than 1.6x. A dividend growth investor might prefer to see ratios greater than 2x, indicating that the company has the capacity to pay a steadily rising dividend.

To calculate the amount that AMZN could pay as a dividend, the formula I utilize looks like this:

Adjusted free cash flow / Dividend > 1.6

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Or, $1,719 million / Dividend > 1.6

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In other words, Amazon could pay, at most, a dividend of about $1,074 million. Distributed over the 465 million diluted shares outstanding at FYE 13, this indicates that one of the largest online retailers could pay an annual dividend of $2.30 per share. This amounts to a 0.6% dividend yield, given a $337 current share price.

For more comparisons on other large cap dividend coverage ratios, see this article on AT&T (NYSE:T) or this article on Starbucks (NASDAQ:SBUX). Please note that Starbucks had a dividend coverage ratio of 3.3x for the most recent six months of operations, and I concluded that this dividend would be raised in the next couple of months.

Next, let's look at AMZN and see how the shareholders' capital is working.

Amazon By the Numbers

Dollars in million

FYE 12

FYE 13

Change

Employees (full time and part time; excludes contractors and temps)

88,400

117,300

33%

Worldwide net shipping costs (shipping revenue less shipping costs)

$966

$1,207

19%

Accounts Payable days

76

74

(3%)

Property and equipment, net

$7,060

$10,949

55%

Cash and marketable securities

$11,448

$12,447

9%

Inventory turnover

9.3x

8.9x

(4%)

Return on invested capital

4%

13%

Free cash flow (Operating cash flow less purchase of Property)

$395

$2,031

414%

Operating cash flow

$4,180

$5,475

31%

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While many pundits point to the thin profits generated by Amazon, the focus of AMZN is sustainable growth in free cash flow per share. I am not aware of another company in the S&P 500 with that same focus. The only comparison I'm aware of is Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B), whose goal is annually trumpeted as growth in intrinsic value per share.

For Amazon, free cash flow is driven primarily by increasing operating income and efficiently managing working capital and capital expenditures. Increases in operating income primarily result from increases in sales of products and services and efficiently managing operating costs. To increase sales of products and services, AMZN focuses on the customer experience: lowering prices, improving availability, offering faster delivery and performance times, increasing selection, increasing product categories and service offerings, expanding product information, improving ease of use, improving reliability, and earning customer trust.

The company has never made mention of an intent to pay a dividend. Instead, the company recognizes that their rapidly changing business models requires large spending in technology and content.

Hiring brainy employees is expensive, and AMZN is always adding computer scientists, designers, software and hardware engineers, and merchandising employees.

One other large use of capital is AWS, which provides technology services that give developers and enterprises of all sizes access to technology infrastructure that enables virtually any type of business.

Conclusion

Amazon is an incredible business with a high degree of scalability. A competitor such as Wal-Mart (NYSE:WMT) or Target (NYSE:TGT) must invest in new stores to significantly increase sales.

In earlier articles, I've concluded that AMZN gets to hold on to more of their supplier's cash, effectively borrowing it from suppliers. By sitting on a supplier invoice for an additional three weeks, AMZN has an incredible source of cash when multiplied over $74 billion in annual sales. For AMZN, Accounts Payable is an unencumbered source of value, and it comes without any interest costs. AMZN can dictate terms to suppliers, and then invest the float in other projects. However, for many investors and analysts, it is unclear whether AMZN is reinvesting the float into profitable projects!

I also don't believe the company will be paying any dividend in 2014 or 2015. Even if the company did pay a dividend, the current yield would be a scant 0.6%.

For investors looking for dividends that could expand over the next two to four years, my articles on Disney (NYSE:DIS) and Altria (NYSE:MO) should be of interest.

This article is the opinion of the author and does not represent investment advice.

Disclosure: The author is long WMT, TGT, DIS. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.