Cash Dividends and Growth in AI Companies: Profit from Progress

Artificial Intelligence has become the buzzword in recent years as more companies—especially tech giants—release and announce features related to Artificial Intelligence (AI) and integrate it into their offerings.

The consumer generative AI market, driven by programs like Google’s ‎Gemini (previously Bard) and OpenAI’s ChatGPT, is set to skyrocket. Bloomberg Intelligence predicts the market will grow from $40 billion in 2022 to $1.3 trillion by 2032, with a CAGR of 42%. Initially focused on training infrastructure, it will expand into inference devices for large language models, digital ads, and specialised software, potentially generating $280 billion in new software revenue.

Companies' increasing focus on AI, especially tech giants, presents significant growth potential and investment opportunities. Companies investing in AI are positioning for future growth through new products, services, and revenue streams, potentially becoming market leaders. This trend could offer investors the chance to diversify their portfolios by including AI-driven companies across various sectors.

Apple Inc 

Apple shares surged to a record high on Tuesday, marking their largest daily percentage increase since late 2022 as Wall Street enthusiastically welcomed the iPhone maker's highly anticipated unveiling of its generative artificial intelligence ambitions; furthermore, Yesterday, it reached a market cap of $3.3 trillion, making it the company with the highest market cap in the US market (surpassing Microsoft Corp). The iPhone maker unveiled its 'AI for the Rest of Us' plan at the WWDC (World Wide Developer Conference). Some of the highlights of the conference include:

• ChatGPT integration: Apple integrated OpenAI models for text generation and other generative features, with plans to support additional AI models.
• "AI for the rest of us": Apple emphasised privacy, handling many AI tasks on-device to keep personal data off external AI clouds.
• Vision Pro update: Apple's augmented reality headset will receive a major software update for creating and controlling content with physical gestures despite recent poor sales.
• Siri's makeover: Siri will gain new features, including in-app actions and improved natural language processing, marking a new era for the voice assistant.

In the past 12 months, Apple's shares have increased by 16%; the company announced its fiscal 2024 second-quarter results, with revenue totalling $90.8 billion, a 4% decline year-over-year, and earnings per diluted share of $1.53. The board of directors approved a 4% increase in dividends that was paid in May 2024 to shareholders. They also authorised a record-breaking $110 billion stock repurchase program. "Thanks to very high levels of customer satisfaction and loyalty, our active installed base of devices has reached a new all-time high across all products and all geographic segments, and our business performance drove a new EPS record for the March quarter."

In terms of dividends, Apple Inc. pays dividends quarterly and has consistently increased its quarterly dividends annually. 

Microsoft Corp

Microsoft Corp, the PC software giant in 2023, announced the third phase of its partnership with OpenAI, which entails increasing investments in specialised supercomputing systems to accelerate OpenAI’s AI research, enhancing Azure’s AI infrastructure for global deployment, integrating OpenAI’s models across Microsoft’s products to create new AI-powered experiences, and providing exclusive cloud support for all OpenAI workloads through Azure. Microsoft's first investment into OpenAI was in 2019.

Spending billions of dollars to expand its cloud computing and AI infrastructure, Microsoft announced several investments in countries like Indonesia, Malaysia, Thailand, Japan and the US. In addition, the software giant also invested in G42, a UAE-based AI firm; the investment will enhance collaboration between the two companies to bring the latest Microsoft AI technologies and skilling initiatives to the UAE and globally.

The software giant announced strong third-quarter fiscal year 2024 results, where it revealed that revenue increased 17% to $61.9 billion, operating income rose 23% to $27.6 billion, net income grew 20% to $21.9 billion, and diluted earnings per share increased 20% to $2.94. Productivity and Business Processes revenue reached $19.6 billion, up 12%, driven by Office and Dynamics products. Intelligent Cloud revenue surged 21% to $26.7 billion, led by Azure. More Personal Computing revenue grew 17% to $15.6 billion, supported by Windows and Xbox. During the quarter, Microsoft returned $8.4 billion to shareholders through dividends and share repurchases. "Microsoft Copilot and Copilot stack are orchestrating a new era of AI transformation, driving better business outcomes across every role and industry," said Microsoft CEO.

Microsoft's shares have been up 31% in the past 12 months, and its quarterly payout to shareholders has increased annually. It recently announced its quarterly dividend (same as the past three quarterly payouts) and is expected to announce an increase following the recent dividend announcement. 

 Social Media and Search Engine giants

Meta Platform Inc. & Alphabet Inc. have also made strides in AI. Whereas Meta Platform rolled out Meta Llama 3, the latest open-source large language model, built with Meta Llama 3, Meta AI is now available globally for free on Facebook, Instagram, WhatsApp, and Messenger, enabling users to accomplish tasks, learn, create, and connect. First announced at last year's Connect, Meta AI is now accessible to more people worldwide.

Last year, Alphabet unveiled Gemini, its largest and most advanced AI model, optimised to operate efficiently across data centres and mobile devices.

Meta Platforms recently paid its second quarterly dividend, while Alphabet just paid its first-ever quarterly dividend. Both are expected to pay the same quarterly amount for a year before increasing or decreasing payouts. Meta's shares have increased 81% in the past year, while Alphabet's shares have increased 44%. 

The Building Blocks of AI 

At the core of Artificial Intelligence, Semiconductor chips are the foundation of hardware for AI models and applications, from cloud/data centre servers to edge devices like sensors. GPU (graphics processing units) deliver top performance for AI training and inference, along with improvements in various accelerated computing applications. AI training demands more computing power, forcing chip developers to increase thermal design power (TDP). As chips heat up, air cooling becomes insufficient, necessitating liquid cooling for AI servers.

NVIDIA (leader in GPU manufacturing), Broadcom (one of the largest semiconductor manufacturers), and Vertiv Holdings (a global leader in thermal management) are some of the stocks that have been on investors' radars; these stocks have produced significant returns for investors in recent years. Interestingly enough, Vertiv joined the NVIDIA Partner Network as a Solution Advisor, expanding access to its power and cooling solutions.

NVIDIA Corp

Initially known for its gaming chips, NVIDIA has shifted focus to data centres powering AI technology. Generative AI and massive data processing rely on NVIDIA's GPUs, which dominate around 80% of the market due to their specialised efficiency for AI tasks. In contrast, widely used CPUs lack this efficiency. NVIDIA's GPUs power AI technologies like OpenAI's ChatGPT, underscoring their critical role in advanced AI development.

NVIDIA shares have seen significant increases in value as the company benefits from investor confidence and earnings growth. For the first quarter of its 2025 financial year, it reported record quarterly revenue of $26.0 billion, up 18% from Q4 and 262% year-over-year, with Data Center revenue at $22.6 billion, up 23% from Q4 and 427% year-over-year. GAAP earnings per diluted share reached $5.98, up 21% from the previous quarter and 629% year-over-year, while non-GAAP earnings per diluted share were $6.12, up 19% from the previous quarter and 461% year-over-year. The chip giant announced nine new supercomputers and expanded collaborations with AWS, Google Cloud, Microsoft, and Oracle to advance generative AI innovation. "The next industrial revolution has begun - companies and countries are partnering with NVIDIA to shift traditional trillion-dollar data centers to accelerated computing and build a new type of data center: AI factories - to produce a new commodity: artificial intelligence," said NVIDIA CEO.

Previously, NVIDIA shares reached $1000 (up more than 200% in one year) after the company announced its stock split. Often, when stocks reach high prices, companies can perform a stock split to make their shares more affordable. Recently, NVIDIA proceeded with a 10-for-1 split, whereby investors received an additional 9 shares for each share they own, and the share price traded 10x lower.

When it comes to dividends, NVIDIA increased its dividend by 150% prior to the stock split and has been paying the same dividend since then. NVIDIA's shares have increased over the past 12 months.

Broadcom Inc.

Broadcom Inc. is another AI stock that announced a 10-for-1 stock split on Wednesday, with shares surging by 11% after the announcement. Broadcom has uniquely targeted the AI accelerator market by focusing on consumer AI, unlike other semiconductor companies that target the commercial/enterprise segment.

Broadcom's revenue in the second quarter grew 43% to $12.5 billion, including VMware, and 12% excluding it. Adjusted EBITDA rose 31% to $7.4 billion, and free cash flow increased 18% to $5.3 billion."Broadcom's second-quarter results were once again driven by AI demand and VMware. Revenue from our AI products was a record $3.1 billion during the quarter. Infrastructure software revenue accelerated as more enterprises adopted the VMware software stack to build their own private clouds," said the President and CEO of Broadcom Inc. Microsoft and Broadcom are also expanding their partnership to support VMware Cloud Foundation subscriptions on Azure VMware Solution. This allows customers to use their licenses on Azure VMware Solution or their own data centers, providing flexibility in deployment options.

Broadcom's shares have been up 97% in the past year, and the company has been increasing its quarterly dividend annually since late 2022. The past two payments are 14% higher than the previous comparative period payments.

Vertiv Holdings

When it comes to cooling systems, Vertiv Holdings provides essential power delivery and cooling solutions for AI-powered data centres, managing the high energy consumption and heat generation of powerful semiconductors like those from NVIDIA. Vertiv shares have risen 300% over the past 12 months, reaching $100 for the first time in May. As a Solution Consultant Advisor in the NVIDIA Partner Network (NPN), Vertiv collaborates with NVIDIA on advanced liquid cooling technologies, including the US government-funded COOLERCHIPS program.

In Q1 2024, organic orders rose 60% year-over-year with a book-to-bill ratio of 1.5x and a record $6.3 billion backlog. Net sales were $1,639 million, up 8%, with an operating profit of $203 million and adjusted operating profit of $249 million, a 42% increase. The company repurchased $600 million in shares and raised its full-year 2024 guidance, expecting 12% net sales growth and a 28% increase in adjusted operating profit.

"Vertiv’s robust momentum in 2023 continued into the first quarter of 2024, led by strength in orders, which grew 60%, exceeding our expectations and reflecting increasing pipeline velocity and acceleration of AI-driven demand ... Though still in its early stages, AI is quickly becoming a pervasive theme across our end markets. Continued advances in GPU development and other AI-enabling technologies are necessitating changes and upgrades to the critical digital infrastructure," said Vertiv’s Chief Executive Officer.

The company started paying annual dividends in 2020 and quarterly dividends recently, and the total dividend paid so far is 400% higher than the previous annual dividend payout(s) before 2023.

Conclusion

Commoditisation of technology is a reality - this occurs when products become indistinguishable from one another, leading to increased price competition and reduced profit margins for tech companies. To stay competitive, companies may focus on cost efficiency, shift to offering services and support, invest in innovation, build strong brand loyalty, explore new markets, form strategic partnerships, and provide customised solutions. This dynamic forces companies to adapt and innovate continually to maintain their market position and profitability.

Importantly, investing in AI also comes with risks, such as high R&D (research and development) costs, regulatory challenges, and ethical concerns. The hype around AI can lead to stock price volatility, with valuations fluctuating based on technological advancements or setbacks. As these tech giants (e.g., Microsoft, NVIDIA, Meta Platforms, Alphabet) advance their AI developments, they could face antitrust hurdles, which could hinder the growth and expansion of AI offerings as well as business growth.

On the positive side, although these stocks have a dividend yield below 1% as of the time of writing, announcements such as increased dividends, share buybacks, and stock splits could potentially boost the share prices of the above-mentioned companies. In addition, investors may also want to closely monitor the earnings call of the above-mentioned companies; beating market expectations as these firms release quarterly results could also positively impact their stock prices.

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