Alibaba Group Holding (NYSE: BABA) recently became the latest large cap tech stock to pay a dividend. After its earnings came out on November 16, the company announced that it would begin paying a dividend of US$1 per year. At today’s stock price, that dividend provides a 1.28% yield. It’s not a very big yield. However, the dividend is only about 22% of BABA’s annual profit. The company can easily afford to raise it and – let’s be honest – if the stock continues trading as badly as it has been, then investors will be able to buy it at a higher yield with or without a dividend hike.
This raises an important question:
Are any of Canada’s technology stocks in a position to pay dividends? A few of them do, but most of the big name ones don’t. Canada’s largest technology company, Shopify, isn’t profitable enough to pay a dividend of any significance. The company is better advised to invest in growth. However, there are some Canadian tech companies that are mature and profitable enough to pay dividends. In this article, I will explore one such company that may initiate a dividend in the future.
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Kinaxis Inc.
Kinaxis Inc (TSX: KXS) is a Canadian tech company that develops supply chain management software. The company develops software that helps businesses improve analysis and decision making in their supply chains. It provides “end to end” supply chain management on a single application. Kinaxis’ software helps businesses improve supply chain processes, reduce costs, and increase efficiency.
An example of how a Kinaxis application might work is as follows:
John manages a bicycle company. He tends to get more orders around the start of the summer, as this is when people ride bicycles the most. John knows this, but the exact numbers of bicycles he’ll need is not always easy to know. So, he uses Kinaxis to find how many bicycles he’ll need in inventory by June 1. John manufactures some of his own bicycles at his shop, so he also needs to know how many supplies he’ll need to produce the inventory he needs. Using Kinaxis, he is able to find this as well. When June 1 arrives, John has enough bicycles to serve every customer who comes into his shop. At the same time, he does not have more bicycles than he needs, so he doesn’t have to sell any at a discount when summer ends.
Can Kinaxis afford to pay a dividend?
Having looked at the basics of Kinaxis’ business, we can now turn to the all important question:
Can it pay a dividend?
Here’s what we know:
In its most recent quarter, KXS delivered the following earnings numbers:
- $108 million in revenue, up 26%.
- $65 million in gross profit, up 60%.
- $7.3 million in earnings, up 354%.
- $22.8 million in EBITDA, up 54%.
- A $1.5 million operating cash outflow, improved by 59%.
As you can see, Kinaxis had $7.3 million in profit. Any amount of profit means that a dividend can be paid. However, it depends on how much profit was earned in comparison to the stock price. If a company earns $10 million and has a $1 trillion market cap, the dividend yield if it pays out 100% of its earnings is trivial. Kinaxis has a $4.3 billion market cap, and its third quarter earnings annualize to $29.2 million. Paying 100% of that as a dividend would give a 0.6% yield. Paying a dividend right now probably isn’t Kinaxis’ best use of funds. The yield would be insignificant. However, the fact that the company is profitable means that it’s a candidate for paying a dividend in the future.
