The assigned research paper reading looked at firm’s decisions and what factors appear to affect payout decisions. For this activity you will write a short one page to one-and-a-half-page paper on a firm (Amazon), of your choosing meeting the following criteria: You can provide a link to the firm’s profile and financial summary (similar to what can be found in Yahoo finance (Links to an external site.) Links to an external site.). Note: this can be other websites and non-U.S. stocks can be used as well
For the selected firm provide a brief profile of the firm including the primary businesses/industry of the firm. Provide an overview of the industry. Address issues such as whether the firm is considered to be in a growth industry, mature industry, and the role/impact your firm has on the industry.
Discuss the payout strategy selected by your firm. What did the firm announce? Why did the firm make the announcement? Based on your study of dividends and other payouts does the strategy make sense? What signals is management sending with the announcement? Do you agree with the decision? As a shareholder would you be pleased with the announcement? Why or why not?
Brief Company Profile:
Amazon opened its virtual doors for business in 1995. The company seeks to become one of the most customer-centric companies of the world. The company operates many retail stores worldwide. The company serves the consumers through retail websites and its physical stores. It has organized its business into three operating segments, including Amazon Web Services, International, and North America. The company serves online retail consumers and physical stores consumers. Other than these it also serves sellers, developers, enterprises, and content creators. The company operates in the consumer cyclical sector and the specialty retail industry. It has over 500,000 employees.
Amazon engages in the retail sale of various consumer products as well as subscriptions internationally and in the region of North America. The company is headquartered in Seattle, Washington.
Overview of Industry
Amazon is a cloud computing and electronic commerce company which was founded by Jeff Bezos. This tech giant is an internet retailer and is considered the largest among the world, internet retailers regarding market capitalization and revenue. The company operates in the specialty retail industry and is considered in the growth stage of its business. It continuously diversifies in different business industry sectors. Looking at its performance against its industry regarding various ratios shows the financial strength of this company. The company has higher current and quick ratios as compared to S&P 500 Index, Industry, and the sector. The company’s working capital ratio is also way better than its industry rivals. Interest coverage is better than the industry rivals as well. The company has lower debt coverage as compared to the industry (CSI Market, 2018).
Payout Strategy of Amazon Inc
Amazon Inc is one of those companies who has never declared or paid any cash dividends on the common stock (Amazon Inc, 2018). The company does not pay any dividends currently, and the company is not expected to change this strategy in coming future as well. The company of Amazon focuses on the growth in its free cash flow per share and the improvement of customer experience rather than on the dividend yield.
The company had cash and cash equivalents of $20,522 million at the end of the year 2017 (Amazon Inc, 2018, p. 40). It had free cash flow of $8376 million in 2017. Looking at the financial strength of the company, the company Amazon Inc can pay dividend of about $1074 million as distributed over its diluted shares outstanding of 465 million shares as of the year 2013, it has the ability to pay out the dividend of about $2.30 per share which means a dividend yield of 0.6% as to the share price of $337. The company has a very rapidly changing business model which gives justification for its securing of the cash (Bellet, 2014).
The company spends twice more than its sales on capital investments. It has spent over 20% of its sales on the capital investments. It is very much interested in repurchasing its shares and investing in intangible assets. The company spends over 10% of its sales on the Research and Development which is higher than Apple Inc as well who spends 3% of its sales. It spends more on intangible assets like employee training, advertising, and codified information. As the company has a greater portion of its capital in cash and spends more on intangible assets as these are equity financed. The company has historically never returned its capital to shareholders. It prefers to have the cash on hand for its flexibility and security. Amazon constantly reinvests which may lead to show disappointing earnings quarterly (GaveKal Capital, 2015). The shareholders are justified by this strategy because the alternative to having lower growth in the future is not acceptable to the company management and its shareholders.
References
Amazon Inc. (2018). Amazon 10K Annual Report 2017. Retrieved from https://www.sec.gov/Archives/edgar/data/1018724/000101872418000005/amzn-20171231x10k.htm
Bellet, J. (2014, July 4). Amazon’s Ability and Intent to Pay a Dividend. Retrieved from https://seekingalpha.com/article/2299455-amazons-ability-and-intent-to-pay-a-dividend
CSI Market. (2018). Amazon Com Inc Financial Strength Comparisons. Retrieved from https://csimarket.com/stocks/AMZN-Financial-Strength-Comparisons.html
GaveKal Capital. (2015, August 5). Amazon and Apple: Two Approaches To Capital Investment. Retrieved from https://www.advisorperspectives.com/commentaries/2015/05/08/amazon-and-apple-two-approaches-to-capital-investment
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