This month marks the five-year anniversary of an era many would rather forget.
The S&P 500 fell nearly 10% in June 2008, and investors began to brace for an eventual market crash later in the year. That was also a time when companies sealed the hatches and girded for tough days ahead, in many instances eliminating dividends that had been in place for many years.
Though many companies eventually restored those dividends, some companies are only now contemplating such a move. By following a few simple markers, you can make some well-informed predictions about which companies could soon issue a fresh dividend.
Before digging into these markers, let’s take a quick look at the 15 largest companies in the S&P 500 that do not currently pay a dividend.
Right away, we can eliminate certain types of companies from contention, simply because they have had many decades to pursue a dividend policy, and never have done so. Warren Buffett‘s Berkshire Hathaway Inc. (NYSE:BRK.A) is a perfect example. His company is such an active acquirer of businesses that retaining cash flow is a key ingredient of success.
This, of course, may change when Buffett relinquishes control. After all, Berkshire Hathaway Inc. (NYSE:BRK.A) has now generated more than $10 billion in free cash flowin each of the past four years, after never having generated more than $7.2 billion in free cash flow in any prior year in its history. The company’s gross cash balance reached $47 billion at the end of 2012, and the topic of a dividend is surely raised at the company’s board meetings.
For that matter, it’s unwise to expect an imminent dividend from the other two $100 billion companies on the list, Amazon.com, Inc. (NASDAQ:AMZN) and Google Inc (NASDAQ:GOOG). These companies are aggressively investing in future growth initiatives in their bid to conquer the technology landscape.
Neither company is showing signs of maturity just yet — but it’s hard to ignore Google Inc (NASDAQ:GOOG)’s ever-rising free cash flow, which hit $13.3 billion in 2012, or its $48 billion gross cash balance at year end. If Google Inc (NASDAQ:GOOG) used all of its free cash flow for a dividend, then the payout would be $40 a share, good for a 4.6% yield.
Earlier, I noted key markers to look for. Free cash flow and current cash are two of them, along withcapital spending. A great industry example is Big Pharma, which includes major drug stocks such as Merck & Co., Inc. (NYSE:MRK), Pfizer Inc. (NYSE:PFE) and others.