Erroneously many believe that dividends are the key to long-term investing. Why is that? Because over the long-term dividend reinvestments are a major part of the returns. However, that doesn’t mean that non-dividend stocks are bad. Quite the opposite, would we say.
This article lists the best stocks without dividends. We argue why you shouldn’t ignore non-dividend stock but rather look for quality companies that can reinvest efficiently in their business instead of paying a dividend to shareholders. We give you a list of 13 good US companies that don’t pay a dividend and most likely won’t in the coming years.
Table of Contents
Should a company pay a dividend or not?
A company can allocate capital in five ways (roughly speaking):
- Reinvest into the existing business(es) (organic growth).
- Do M&A (diversify).
- Pay back debt.
- Pay a dividend.
- Buy back shares.
How managers allocate capital is of the utmost importance, but still widely misunderstood by investors and owners. Even worse, rarely do we see a company give a clear justification or explanation of their capital allocations.
It’s a shame because smart allocations are just as important as managing the underlying operations.
In the excellent book by William Thorndike called The Outsiders, he explains well why allocations are important:
Stated simply, two companies with identical operating results and different approaches to allocating capital will derive two very different long-term outcomes for shareholders…..This inexperience (managers having no education or training in capital allocation) has a direct and significant impact on investor returns. Buffett stressed the potential impact of this skill gap, pointing out that “after ten years on the job, a CEO whose company annually retains earnings equal to 10% of net worth will have been responsible for the deployment of more than 60% of all the capital at work in the business.
The Outsiders, William Thorndike, page xiii
Best Stocks Without Dividend
Below we have compiled a list of companies that we believe have smart allocations. Keep in mind that we are not looking at valuations, only at the business. An overvalued great business might turn out to be a poor investment if the valuation multiples contract. This is what happened to, for example, Intel and Microsoft at the height of the dot-com bubble. Both returned nothing for 10 years because their PE multiples contracted from 50 to 15 (despite continuous growth)!
Berkshire once paid a dividend over 50 years ago, where Buffett jokingly says he must have been in the toilet when that decision was made. Investors should be very thankful that Mr. Buffett has not opted to pay a dividend: The reinvested earnings have grown at almost 20%, something we can safely say you most likely wouldn’t have achieved with any dividends received.
As a result, the shareholders of Berkshire have become immensely rich.
Is Berkshire still a great company? Of course. Despite the age of Buffett and Munger, we believe that Berkshire will continue thriving for many years after the two gentlemen fold. The culture will remain for a long time.
Will they initiate a dividend in the future?
We don’t know, but we are sure they will allocate capital intelligently for many years: A dividend will only happen when they have BOTH idle cash and Berkshire is overvalued.
Markel is a Mini-Berkshire managed by Tom Gayner. Just like Buffett, Gayner has an outstanding track-record in managing capital.
To our knowledge, Markel has not paid a dividend for 40 years, and we believe they are unlikely to do so for a long time. Markel is still small and has a long runway ahead of them ahead.
We have covered Markel in a separate article which you can find here:
Amazon is yet another company shareholders are grateful for not having received a dividend, and at the moment are unlikely to receive in the coming years.
Jeff Bezos is smart and he thinks long-term.
The business is simple to understand: they lend and service loans to car buyers. However, they only lend to subprime borrowers, but the deals are structured so that all three parties can benefit (the lender, the borrower, and the car dealer).
CACC has a history of allocating capital well.
We have previously written a long analysis on the company:
Booking is yet another compounder managed by operators with substantial skin in the game.
Booking provides travel and related booking services. Subsidiaries include rentalcars.com and Priceline.com.
Facebook probably needs no introduction. It’s a controversial company, but we believe it still has a great future ahead. It owns many great assets that are yet to be properly monetized, like Instagram and WhatsApp.
Alphabet, the owner of Google, has one of the strongest brands on the planet. Alphabet is a collection of many other companies, but the search engine and YouTube are of course the biggest part of this and where the profits are made.
We believe they have a durable brand and getting stronger by a regulatory moat. Moreover, the network effect is strong. The users are “trapped” into the eco-system via Gmail, Chrome, YouTube, Play, etc. The more products a customer uses, the more advertising Alphabet earns.
The downside is that the income is mainly from advertising and thus a bit cyclical in nature.
Edwards Lifesciences (EW):
Edwards Lifesciences has never paid any cash dividends and has no current plans to pay any. The current policy is to retain any future earnings for use in the business.
It’s a healthcare company that mainly makes products and technology for heart diseases. Due to the obesity pandemic, which is showing no signs of stopping, we believe this is a great field to operate in.
The company uses surplus capital to buy back shares. This has resulted in about a 10% reduction in the outstanding shares over the last ten years. We can argue how smart it is to buy back shares instead of paying a dividend due to the constant high earnings multiple: currently around 60.
But no matter what, the company has excellent growth and outstanding margins in a non-cyclical business.
Biogen is a drug company that mainly focuses on neurological diseases.
Just like Edwards Lifesciences the company prefers to buy back shares instead of paying a dividend. Because the earnings multiple is lower than Edwards, the buybacks have been much more effective: over the last ten years, the outstanding shares are reduced from 245 to 156 million shares – a 36% reduction.
Paypal is a financial e-commerce company that has developed a substantial moat. Even though fees are high, users keep on buying via PayPal simply because of the network effect, which is extremely sticky.
Autozone is a retailer that sells auto parts. Its demise has been called constantly, but still, the company grows its earnings like clockwork.
Autozone has never paid a dividend, and most likely never will. Instead, they buy back shares constantly. The outstanding shares are reduced from 154 million in 1998 to just 23 million today!
This has resulted in massive earnings growth from 0.19 per share in 1990 to 90 today.
Autozone is still trading at moderate levels compared to the market: a PE of 17.
Autozone’s competitor, O’Reilly (ORLY), is doing the same capital allocations as Autozone.
Verisign is authorized to manage the .com and .net registry. Moreover, the company operates servers used for routing internet traffic. Over the years, they have sold off businesses to focus only on the two operations mentioned.
Verisign is a cash machine that spends all free cash flow buying back shares. Today, with a PE of about 40, the buybacks are not very effective. Since 2011 the outstanding shares are reduced from 167 to 114 million.
Charter has been in the investment portfolio of Berkshire Hathaway for a few years, and the company is a result of some mergers back in 2016. The business is providing television, Internet access, and some phone services to about 15% of the US population.
Charter allocates capital to the business or buy back shares.
To get a better understanding of why this is a great business, please read our coverage of Comcast:
The Berkshire Clone/Compounder Portfolio:
We have put together a portfolio of 22 stocks that we believe are quite similar to the mindset of Warren Buffett and Berkshire Hathaway.
The aim of the portfolio is to get a good long-term return via companies that have both good operational management and good capital allocation skills.
Disclosure: We are not financial advisors. Please do your own due diligence and investment research or consult a financial professional. All articles are our opinion – they are not suggestions to buy or sell any securities.
Why do some investors believe dividends are key to long-term investing?
Answer: Dividends are often considered a significant part of long-term returns as dividend reinvestments contribute to overall investment growth. However, this doesn’t imply that non-dividend stocks are inferior.
Why should investors not ignore non-dividend stocks?
Answer: Non-dividend stocks can be valuable investments as companies reinvest efficiently in their businesses instead of paying dividends. This article provides insights into quality companies that don’t pay dividends but offer strong investment potential.
Why are smart capital allocations crucial for long-term shareholder outcomes?
Answer: The book “The Outsiders” highlights that companies with identical operating results and different capital allocation approaches can yield vastly different long-term outcomes for shareholders. The article underscores the impact of wise capital allocation on investor returns.