After years of pursuing performance growth at any cost, tech giants in the US stock market have begun to fully draw on the practices of old-school value companies — paying dividends and increasing the scale of stock repurchases. These tech giants continue to improve their ability to pay cash to the extent that free cash flow allows. This shift to dividend payments and improved repurchase styles can be said to provide strong evidence of their strong financial strength. Therefore, from a strong fundamental perspective, the “Magnificent 7 US Tech Giants” (Magnificent 7) stock rally led by Nvidia and Microsoft is probably still the core driving force leading US stocks to soar in 2024 after 2023.

It is worth noting that since this year, many US technology companies have launched quarterly dividend plans for the first time. Although dividend yields are not very high, dividend payouts and buyback news have continued to cause the US stock market to rise sharply, mainly because investors regard this move as an important force supporting the pace of the US stock bull market — that is, technology companies, which can continue to provide strong cash flow and a solid signal of solid fundamentals.

$Alphabet-A (GOOGL.US)$The first dividend was announced last month, stating that a dividend of 20 cents per share will be paid, and additional share repurchases will be raised to 70 billion US dollars, driving the stock price of Google's parent company up 10%. Currently, the market value is close to 2.1 trillion US dollars.

Previously in February of this year, Facebook and Instagram parent companies$Meta Platforms (META.US)$The announcement of the first dividend, indicating a dividend of 50 cents per share, and the announcement that an additional 50 billion US dollars of shares will be repurchased, have jointly contributed to the company's historic huge increase in stock prices. Furthermore,$Salesforce (CRM.US)$und$Booking Holdings (BKNG.US)$Other technology companies also announced dividends this year.

Mark Iong, stock fund manager from the investment agency Homestead Advisers, said: “Dividends will be the future bargaining chip for big tech companies.” “I think if you choose not to pay dividends, this would now be seen as a sign that the fundamentals of the company's business are more unstable.”

The fundamentals of “Magnificent 7” can be called “rock solid”

In most classic cases, new dividends are accompanied by large-scale share buybacks, indicating that as generative artificial intelligence technology becomes a new driver of their performance growth, companies are choosing to refocus on the level of shareholder returns. Analysts expect that this classic combination will continue to support the stock price rise of the “Magnificent 7” tech giants, which hold a high weight in the S&P 500 index, which in turn will drive the rise in US stocks.

The Magnificent 7 includes:$Apple (AAPL.US)$,$Microsoft (MSFT.US)$,$Alphabet-C (GOOG.US)$,$Tesla (TSLA.US)$,$NVIDIA (NVDA.US)$,$Amazon (AMZN.US)$and$Meta Platforms (META.US)$. Global investors have continued to flock to the seven tech giants since 2023 and the first quarter of 2024. The main reason is that they are betting that technology giants are in the best position to use artificial intelligence technology to expand revenue due to their huge market size and financial strength.

While paying dividends and increasing buybacks, “Magnificent 7” continues to cut costs to increase profits, so the fundamentals are extremely strong. “Investors are excited that they are simultaneously paying dividends and buying back shares while cutting costs and achieving growth. This is an overall acceleration of corporate profit growth.” Homestead Advisers equity fund manager Mark Iong said.

Currently, among the so-called “seven major US tech giants” (Magnificent 7), only Amazon and Tesla have yet to pay dividends, but the net profit indicators are still quite stable and still reflect solid fundamentals. “It's hard for Amazon not to choose to follow suit.” Long display.

An Amazon spokesperson mentioned the company's recent earnings call in an interview. In a conference call, Amazon Chief Financial Officer Brian Olsavsky (Brian Olsavsky) said that the company's focus is on capital expenditure and debt repayment rather than shareholder return. Tesla said on its website that it does not expect to pay any cash dividends in the foreseeable future.

AI chip leader Nvidia's quarterly dividend yield of 4 cents per share is only 0.02%, which has not been raised since 2018. The chip designer generated up to 28 billion US dollars in cash last year, but the dividend returned to investors was less than 400 million US dollars, but the share repurchase amount was as high as 9.5 billion US dollars. According to the average estimates of Wall Street analysts compiled by the agency, Nvidia's operating cash is expected to more than double this year to reach 58 billion US dollars.

The stock price of Facebook's parent company Meta rose by about 35% this year, while the stock price of Google's parent company Alphabet rose by about 21%. Both outperformed the Nasdaq 100's 7.9% increase.

High free cash flow and a solid balance sheet are the core factors that make big tech companies popular on Wall Street and among investors around the world. According to Wall Street analysts' expectations, the top six US tech giants by market capitalization are expected to generate more than 416 billion US dollars in free cash flow this year.

Stock buybacks are still popular on Wall Street, and tech giants are already close to paying dividends

Despite this, share buybacks — that is, by reducing the number of shares to support the earnings per share benchmark — are still the most preferred method for these technology companies to return funds to shareholders, and are still extremely favored by Wall Street investment institutions. Stock prices often go through an upward period after announcing the buyback news.

According to data compiled by the agency, the “Seven Major US Tech Giants” (Magnificent 7) has spent nearly 58.5 billion US dollars on share repurchases this year, while the capital allocated to dividends is less than 11 billion US dollars.

Meta's dividend, for example, was accompanied by repurchases of up to $50 billion, while Alphabet's dividend was accompanied by repurchases of $70 billion. Apple, which began paying dividends more than 10 years ago, also announced the largest share repurchase in the history of the US stock market last week: 110 billion US dollars, surpassing the historical record of 100 billion US dollars set in 2018.

Daniel Peris (Daniel Peris), senior portfolio manager from Federated Hermes, said, “These companies still prefer to buy back stocks, and the dividend yield is not high, but I think these companies are moving in the direction of dividends, which explains the problem.” Perry has written several books on dividend investing.

“As a dividend strategy investor, a company with a mature performance model announced dividends is a very good sign, but it is only very positive when yields continue to accumulate, and we haven't reached that level yet.” Perris said.

Due to high expenditure projects such as R&D, technology companies are often able to pay dividends on relatively small amounts. Meta and Alphabet's dividend yield indicators are below 0.5%, and Apple's dividend yield is slightly higher. In contrast, the overall dividend yield of the S&P 500 index once reached 1.37%.

Dividends are partly intended to encourage long-term stock holdings, and this effect will gradually increase over time. Microsoft's dividend yield is around 0.7%, but it continues to accumulate. Over the past 20 years, Microsoft's stock price has risen as much as 1500%. However, counting dividends, the increase can reach up to an astonishing 2,400%.

Under the “Magnificent 7” lead, US stocks are expected to continue to reach record highs

Bank of America strategist Michael Hartnett (Michael Hartnett), who has the title of “Wall Street's Most Promising Strategist,” recently pointed out that until real interest rates rise and concerns about the economic recession, the US stock market may continue to rely on a few large stocks to guide the direction of the market.

Strategist Hartnett pointed out that US tech giants are expected to continue to lead US stocks to new highs. In other words, US stocks will continue to rely on the seven tech giants, which hold high weight stocks, to determine the general market direction, until the actual yield on 10-year treasury bonds rises to about 3%, or until higher yields combined with larger credit spreads pose a threat to the recession.

Wedbush, a well-known investment agency on Wall Street, said that the profit environment for US tech giants still seems to be strong, especially considering the fanaticism of companies and consumers about artificial intelligence, which has driven a sharp upward trend in technology stocks over the past year. Wedbush said that extensive field research has made the agency very confident in corporate AI spending. It is estimated that AI spending is expected to account for about 10% of the enterprise IT budget this year, and less than 1% in 2023.

Wedbush said that a strong US earnings season may be the main positive catalyst for technology stocks in the near future, and the agency predicts that by the end of 2024, the Nasdaq 100 index, which covers many US technology stocks, is expected to continue to reach record highs.

The Goldman Sachs Strategy Team said that the seven tech giants accounted for 11% of the total sales of the S&P 500 Index in 2023 and 18% of total profit. At the same time, the agency expects the seven tech giants to increase their earnings per share (EPS) by at least 20% in 2024, making the biggest contribution to the S&P 500 Index's overall EPS. Looking at the compound annual growth rate (CAGR), the overall sales CAGR of the “Big Seven Tech Giants” from 2013 to 2019 was as high as 15%, while the compound annual growth rate of other stocks was 2%. This gap narrowed for a while from 2021 to 2022. However, Goldman Sachs strategists expect that from 2023 to 2025, the overall sales of the “Big Seven Tech Giants” will reach a compound annual growth rate of 11%, while the compound annual growth rate of the other components of the S&P 500 index is only 3%.

Regarding the S&P 500 index's future market, Wall Street investment institutions are generally optimistic and bullish. It is expected that even if the Federal Reserve does not announce interest rate cuts this year, it is still expected to continue to reach record highs under the strong performance indicators and gains of tech giants.

Tom Lee, co-founder and head of research at Fundstrat Global Advisors, an American investment agency with the title of “the magic operator of Wall Street,” recently predicted that the S&P 500 index is expected to reach 5,700 points this year (as of Friday's close, the index closed at 5222.68), ranking among Wall Street's most optimistic S&P 500 expectations, higher than the 5,500 point bull market forecast given by Bernstein, Wells Fargo, and Oppenheimer. Lee was one of the few bulls on Wall Street to successfully predict the S&P 500 bull market in the second half of the year last year, and he accurately predicted the upward trend of US stocks in 2023 at the end of 2022.

Editor/Somer