There are many ways for companies to allocate capital, and depending on their strategy, business model, and outlook for the industry they are active in, companies can make vastly differing decisions. Some prefer to make hefty payments to their shareholders via dividends and/or share repurchases, while others favor higher growth investment via either capital expenditures or by pursuing acquisitions of other businesses to bolster their own growth outlook.
Depending on an individual investor’s goals, it can make sense to focus on companies that employ capital allocation strategies that are consistent with one’s own goals, such as focusing on Dividend Aristocrats and other companies that are committed to raising their dividends if one is seeking a safe income stream for one’s retirement.
Alibaba (BABA), which is one of China’s largest tech companies, has so far not made dividend payments to its shareholders. Instead, the company has focused on enhancing its growth rates and improving its market position through heavy investments into its operations, as well as through an array of acquisitions.
In this article we will try to gauge the likelihood of dividend payments by Alibaba in the future, in order to find out whether the stock could become a suitable pick for income-oriented investors a couple of years down the road.
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Alibaba operates several businesses, the most important ones are its e-commerce platforms Alibaba.com, Tmall, and Taobao. Alibaba’s ecommerce business, which it calls core commerce, is oftentimes compared to that of Amazon, although its focus is a little different. Alibaba does not sell a lot of goods itself, it primarily focuses on providing a platform for other businesses to sell their goods on. This means that Alibaba’s operations are slimmer than those of Amazon, and Alibaba does not need to invest heavily into infrastructure such as warehouses.
Alibaba provides other services on top of its core commerce offerings, including cloud computing and digital media offerings. Alibaba is one of the largest tech companies in China, sporting a market capitalization of $455 billion, which also makes Alibaba one of the largest tech companies globally.
Alibaba Is Focused On Growth
Like many other tech companies, Alibaba is focused on growing its business at a rapid pace. This has worked out very well for the company in the past, thanks to industry tailwinds for the e-commerce industry as a whole, combined with the fact that consumer spending in China and other Asian countries is growing rapidly. Thanks to China’s strong economic growth, the amount of Chinese consumers with middle class incomes has risen rapidly during the last decade, and forecasts see significant increases in average incomes and wealth levels during the next couple of years as well. This provides a strong backdrop of economic conditions for Alibaba’s e-commerce offerings in China and neighboring countries.
Source: Alibaba Investor Presentation
Alibaba’s strong growth outlook over the next couple of years is reflected in the company’s excellent revenue growth rate of 51% during the most recent quarter. Thanks to increasing user counts on its platforms and rising spend per user, Alibaba should be able to maintain strong growth rates over the next couple of years.
Alibaba does not only pursue growth in its existing larger platforms such as Tmall and Taobao, though, the company also ramps up new services and platforms. This includes investments in its cloud computing business, as well as investments into offerings such as Alibaba’s news platform UC News and its video platform Youku. Alibaba pursues the entrance into new markets to diversify its revenue base, and on top of that its investments into non-core industries allow the company to benefit from strong market growth rates in sectors such as cloud computing. Alibaba’s growth strategy includes acquisitions and purchases of equity stakes in smaller companies such as AutoNavi, a Chinese map and navigation company, and Lazarda, a Southeast Asia focused e-commerce company. These takeovers and investments into other businesses require significant cash outlays, which is why Alibaba has not made a lot of shareholder payments despite producing ample cash flows:
Alibaba’s operating cash flows during the last year totaled $22.5 billion during the last four quarters, while free cash flows totaled $14.7 billion during the same time frame, as Alibaba has spent about $8 billion on capital expenditures over the last year. Free cash flows of $14.7 billion give Alibaba’s shares a free cash flow yield of roughly 3%, which is not overly much, but which would be sufficient to make some dividend payments nevertheless.
Due to the fact that Alibaba is focused on growing its business empire for now, including through acquisitions and purchases of equity stakes, much less than $14 billion is available for shareholder returns for now. Alibaba does repurchase shares regularly, but not at a very fast clip, and due to the fact that Alibaba also regularly issues shares and options to its employees and executives, its share count has not been shrinking meaningfully. As Alibaba seeks to dominate China’s e-commerce industry, while also having aggressive growth plans for its e-commerce businesses in other countries and for its ventures in other industries, it seems unlikely that Alibaba will reverse its strategy and focus on shareholder returns via dividend payments any time soon.
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Alibaba is a leading e-commerce and tech company in China, and the company has racked up a highly attractive growth track record over the 20 years since the company was founded. Shareholders have participated via strong share price gains, but there have not been any dividend payments so far.
Alibaba should be able to grow its revenues and earnings at an attractive rate during the next couple of years as well, thanks to highly favorable macro trends such as a shift to online shopping and rising incomes for Chinese consumers. Alibaba’s growth focus, on the other hand, means that the company will most likely continue to invest its cash flows into new businesses and acquisitions to enhance its growth rates further.
This means that not much of Alibaba’s quite solid free cash flows will be available for shareholder returns, which is why we believe that it is unlikely that Alibaba will make any meaningful dividend payments during the next couple of years. Alibaba looks like a strong pick as a capital appreciation investment for investors that want to benefit from China’s rapidly growing middle class, but Alibaba is not suitable for income-oriented investors right here.