Should Adobe pay out dividends?

When it comes to Dividend Growth Investing, putting money to work in high-quality businesses that have the growth potential to sustainably hike their shareholder distributions for decades is a key success factor.

As a long-term oriented investor looking for reliable passive income sources, you want to have pieces of companies like French beauty care enterprise L’Oreal, Swiss food giant Nestlé or chocolate maker Hershey in your investment portfolio. The list of so-called “dividend aristocrats” – businesses that hiked their dividends for an uninterrupted time period of over 25 years – goes on. Take a stake in Mc Donalds here, and some shares of PepsiCo and Coca-Cola there, throw in some Procter & Gamble stocks … et voilà, you are taking the right steps in constructing a solid dividend portfolio. Of course, this is always under the condition that you pay a fair price. As always, it’s only an attractive investment unless you overpay.

Of course, there are always interesting options to “spice things a bit up” with some high yield stocks, which e.g. can be found in the commodity and insurance sector. But there is a flipside of yield stocks: more often than not, there is a reason for seemingly “cheap stocks” with a high dividend yield. Just take tobacco stocks for instance. Besides the moral aspect, there is to some degree risk of putting money in a “high yield trap”.

Besides the high-quality dividend growers and high yield stocks, there is another group that a Dividend Growth Investor should have an eye on companies that are not yet paying dividends, but could potentially start distributing a portion of their high and reliably growing Free Cash Flow. I am thinking here of a nice group, consisting of Facebook, Alphabet, and Adobe.

Just think of that: if someone had invested in Apple and Microsoft 25 years ago – let’s say USD 10’000 in each position – these holdings would not only have grown tremendously in market capitalization, but the collected dividends would have been substantial.

Now let’s get back to Facebook, Alphabet, and Adobe.

Facebook is the absolute blue-chip stalwart. I mean, this company is so dominant through its platforms and it has not even fully monetized all of them. And Alphabet is just so massive, we are talking about over one trillion in market cap. Google and Youtube are here to stay in the next decades.

Given the dominant positions of Facebook and Alphabet, I sometimes wonder whether it makes really sense – from a small shareholder standpoint – that both companies are each sitting on more than USD 100 Bn in cash. Which acquisition target could have that size and be approved by regulators? No, in my view, the real next-decade growth drivers for Facebook and Alphabet will be organic. In my view, it won’t be acquisitions. Smaller ones won’t pull the needle and the larger acquisition targets (over USD 100 Bn) are highly unlikely to go through. So, sooner or later, the growth rate will come down, and even share repurchase programs won’t satisfy investors. We are not already there, I guess it will take at least five years, but I wouldn’t be surprised to see at least one of the two payouts a dividend. It will then be the start of amazing dividend history.

So, while paying out a dividend could make sense for Facebook and Alphabet a few years from now, in the case of Adobe, making shareholder distributions would not be in the best interest of investors.

I mean, there is just too much growth ahead for Adobe, that software company is just in an enviable position.

Just look at the applications Photoshop, Adobe Acrobat, and the Creative Cloud, these are segments that are literal money printing machines, these have only a moderate need for reinvestments and they are really sticky with an amazingly entrenched market share.

Adobe is an excellent business, it’s dominant, no doubt about that. Just look at PDF documents for certain files. Only Acrobat can be used to make edits.

But what’s intriguing is that besides the huge economic moat, high growth can still be reasonably expected. That’s because Adobe, which sports a market cap of around USD 250 Bn is still relatively “small”, compared for example to Microsoft.

Adobe has plenty of room to grow organically, but also to combine it with clever acquisitions. And here, having a war chest is key.

So to sum up, I’d say that in the case of Adobe, paying out dividends would not be sensible. That wonderful company will continue to grow at around 15- 20 % annually for the years to come. It will reinvest and make acquisitions, it will buy back its own shares.

Adobe has a great economic moat but not (yet) the dominance of Microsoft, Alphabet, or Facebook. These will be “maturing” high-tech companies a few years down the road. But not so with Adobe. There are a lot of great things ahead.

Disclaimer
You are responsible for your own investment and financial decisions. This article is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.

About Savy Fox

SavyFox is an investment blog that writes about various interesting investment topics and shares research and opinions with respect to Stocks, Peer 2 Peer Lending, or Crypto Currency investment opportunities.

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