Big tech is about to change the stock market forever

Feb 4, 2024

The huge dividends announced last week by Meta, the company that controls Facebook and Whatsapp, will pay for a lot of hoodies, and will at least spin out enough cash to keep Sir Nick Clegg from contemplating a return to British politics. 

They will generate as much as $700m (£550m) annually for its founder Mark Zuckerberg, and plenty for the rest of his senior team. 

But it marks something far more significant than that. This is the moment when big tech starts its transformation into big cash. 

Over the next few years, all the giants of the internet will start to rival the oil and pharmaceutical conglomerates for the vast sums they generate for their shareholders – and all that cash will start to transform how the stock market works as well.

It was far more than anyone expected. When it announced its results last week, Meta safely put its ill-judged foray into virtual reality to one side, and launched something that will be far more exciting for its owners. A dividend. 

With soaring profits, it said it would pay its first dividend in its 20-year history, returning $1.25bn to its shareholders, with another potential $50bn in the form of share buy-backs

You can now buy the equity not just for its growth prospects, but for the income it generates as well. Investors, understandably, like the sound of that, sending the shares up by 15pc on the day it was announced, and pushing the value of the company up to an all-time high, more than recovering all the post-pandemic losses it suffered on its move into headsets.

And yet it will surely just be the first of the technology giants to start returning cash to its owners. Apple stopped paying out anything under Steve Jobs – he thought it was a crazy waste of money that he could spend on new gadgets instead – and has only paid out the minimum possible since he died. 

At some point that will have to increase. Amazon announced blockbuster profits last week, and moves such as showing ads on Prime should drive earnings even higher, so it is surely only a matter of time before it starts a payout. 

Alphabet, the owner of Google, may not be able to resist paying something out of its $113bn cash pile for much longer. With surging revenues from its crackdown on password sharing, Netflix is making lots of money, and may be forced to return some of it. 

Nvidia will have plenty of room to increase the paltry 0.3pc it currently pays to its shareholders, while if Tesla can afford to pay Elon Musk $50bn, assuming he can overturn the court ruling against that decision, surely it can afford to pay something to its shareholders as well?

The giant tech companies will start to rival the oil, pharma and banking conglomerates for their ability to deliver huge sums of money for their shareholders every quarter. Given their size, their semi-monopolistic positions, and their growth rates, they will probably quickly overtake them. 

The $100bn that the five major energy companies paid out last year will look modest by comparison. That will change the market in three fundamental ways.

First, the tech giants will turn from growth companies into cash cows. Once you start paying out dividends, the expectations of shareholders starts to change, and so do the kinds of investors and funds buying into the stock. 

At first they might be grateful for the payout, but very quickly they come to rely on it, and expect it to steadily increase every year. The companies may start with a modest dividend, but will soon have to start paying out more and more all the time.

Next, far more money will be available for the rest of the market. If the payouts start to match the $100bn delivered by the energy giants, and there is no reason why it shouldn’t, then most of that cash will find its way back into other equities. 

That will drive the whole market upwards, as cash that was sitting on the Meta or Alphabet balance sheet starts to be deployed elsewhere. 

It may well mean that markets, such as the UK most of all, that are primarily valued for their cash generation will start to do slightly better. It will also mean that investors look to different countries and industries to generate the kind of excitement that they used to get from the major tech giants (indeed, the emerging markets may well come back into focus).

Finally, the growth of the tech giants will start to slow down significantly. There is a big difference between running a company that is expected to expand as rapidly as possible, and one that is expected to deliver lots of cash for its shareholders four times a year (just ask the finance director of BP or Vodafone). 

It changes the perspective, and the incentives of the people in charge. We can expect to see fewer madcap ventures into virtual reality, self-driving cars, or indeed company beekeepers, such as the one that Google had on the payroll for a while, and more emphasis on the bottom line.

That may be better or worse. Less money will be wasted on stupid, extravagant ideas, but there will also be less innovation. But it will be very different.

The transformation will be a watershed moment for the global markets. The giants of the industry will start to slow down, they will pay far more attention to the bottom line, they will be a lot tougher to work for and they will prioritise profits in a way that they didn’t in the past. 

And yet it will also vastly improve the cash returns for investors, generating billions in payouts over the next decade. They will have to look elsewhere for turbo-charged growth – but a lot of extra money will be generated along the way.

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