Being able to pay a dividend requires a company be profitable and produce positive cash flows. Many companies in the technology sector do not pay a dividend because they are often reinvesting back into their business.

For this reason, many high-growth tech companies are unable to pay a dividend because of negative cash flows.

One company that is both profitable and producing positive free cash flows is Alibaba (BABA). The question for income investors is, will the company ever pay a dividend?

Business Overview

Alibaba is an e-commerce giant that provides online and mobile commerce business in international markets, primarily China. The company consists of four business divisions: Core commerce, cloud computing, digital media, and innovation initiates. Of these, the core commerce division is the most vital to Alibaba as it produced nearly all of the earnings for the company.

The Chinese middle class now numbers more than 300 million people and this group is expected to double in size over the next decade. With a strong presence in China, Alibaba is in a prime position to see its business accelerate going forward.

This acceleration is already taken place now. Alibaba’s revenues grew by more than 50% in 2018, mostly due to its core commerce business. The company’s annual active users increased 18.5% to 654 million people. Mobile customers grew 17% to 721 million customers. Even better for the company is that more than 70% of the increase in active consumers came from the less developed cities in China.

This growth has shown up on the company’s bottom line. Since going public in 2014, Alibaba’s earnings-per-share have more than tripled. There are not very many high-growth tech companies that are showing this level of profit growth.

Free Cash Flow

Growth of this magnitude doesn’t come cheap. Alibaba has had to reinvest into its business as the company has spent an immense amount of capital to help grow its customer base. Over the last three years, product development, marketing, and general & administrative expenses consumed between 70% and 80% of total revenues each year.

For most companies, this level of consumption would mean that free cash flow would be materially impacted. That isn’t the case for Alibaba, as the company has had positive free cash flows for the past seven years. Free cash flow has grown at a high level during this time. In 2013, the company produced $2 billion of free cash flow. Fast forward to the present and that total has increased to nearly $15 billion for the last 12 months.

Will Alibaba Ever Pay a Dividend?

Free cash flow of this scale has allowed Alibaba to maintain a very strong balance sheet. The company’s net debt is $18.5 billion, which is less than two years of the company’s earnings. Alibaba only pays out a small portion of operating income (less than 10%) in interest expense.

That being said, we feel that it is unlikely that Alibaba will ever pay a dividend. High-growth companies, even those that are enjoying positive free cash flows, are often slow to return excess capital to shareholders as this can signal to investors that the company feels its acceleration is slowing down.

Alibaba is also looking at other way to raise more capital in order to fuel its growth. The company has begun the process for a secondary listing in Hong Kong and will likely use the estimated $20 billion it will receive there to grow other aspects of its business.

The majority of Alibaba investors likely hold the stock because of the company’s growth rate. Very few, if any, hold the name because of the potential for income down the road. This will lessen the pressure the company feels to pay a dividend.

Final Thoughts

China is a prime market for Alibaba and the company has seen extensive growth rates in users in recent years. Though that growth has allowed Alibaba to become both profitable and free cash flow positive, it is likely that the company will not pay a dividend in the near future.

The free cash flow will likely allow Alibaba to continue to invest in its business, which will in turn help to grow the company’s top and bottom lines. Paying a dividend, however, is not likely to occur while Alibaba remains in its high-growth mode.