SUPERNEWS

Equities

Morgan Stanley Tips PayPal, Palo Alto for Dividends

Morgan Stanley predicts more tech giants to initiate dividends, highlighting investor confidence and potential market outperformance.

By Max Weldon

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5/10, 12:03 EDT
Apple Inc.
Airbnb, Inc.
Expedia Group, Inc.
Alphabet Inc.
lululemon athletica inc.
Meta Platforms, Inc.
Microsoft Corporation
NVIDIA Corporation
Palo Alto Networks, Inc.
PayPal Holdings, Inc.
Regeneron Pharmaceuticals, Inc.
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Key Takeaway

  • Alphabet and Meta Platforms' new dividends signal a trend of major corporations expressing confidence through dividend initiation or increase.
  • Companies starting dividends tend to outperform the market by 6.5% in six months, with consumer staples, energy, and communication sectors leading.
  • Morgan Stanley identifies PayPal, Palo Alto Networks, and Expedia among potential candidates for initiating dividends due to strong financial metrics.

Dividend Initiatives Signal Confidence

Morgan Stanley has highlighted a growing trend among major corporations to initiate or increase dividends, signaling a robust vote of confidence in their business models and future prospects. Analyst Todd Castagno pointed out that such moves not only convey a positive outlook but also attract a broader investor base, including those focused on income generation. The recent announcements by Alphabet and Meta Platforms to start paying dividends underscore this trend. Alphabet has committed to a 20-cent per share quarterly dividend, and Meta Platforms has set its dividend at 50 cents per share. These initiatives have expanded the group of leading tech companies, often referred to as the "Magnificent Seven," that offer dividends to their shareholders, joining the ranks of Nvidia, Microsoft, and Apple.

Market Performance Post-Dividend

According to Castagno's analysis, companies that begin paying dividends tend to outperform the market significantly. On average, these firms see a market performance increase of 6.5% within six months and 9.2% within a year following their dividend announcement. This trend spans across various sectors, with consumer staples, energy, and communication services showing the most substantial gains. However, the materials sector typically underperforms after such announcements. This data suggests that initiating a dividend can be a strong indicator of a company's health and its management's confidence in sustained cash flows and profitability.

Potential Dividend Candidates

Morgan Stanley's research also identified several companies as potential candidates for initiating dividends, based on criteria such as a market capitalization exceeding $35 billion, a strong net cash position, and a free cash flow yield above 3%. Among the notable names on this list are PayPal, with a free cash flow yield of 7.85%, and Palo Alto Networks, with a yield of 3.2%. Other companies include Expedia Group, with the highest free cash flow yield of 12.6% among the candidates, despite its shares slumping 26% this year. Newly public Instacart, along with Lululemon Athletica, Airbnb, and Regeneron, also made the list, showcasing the diversity of sectors where companies might soon offer dividends to their shareholders.

Street Views

  • Todd Castagno, Morgan Stanley (Bullish on dividend-initiating companies):

    "Committing to a consistent dividend sends a positive signal to the market, conveys management’s confidence in the business, and opens the stock up to income oriented investors."