Morgan Stanley says these ‘dividend hopefuls’ could generate big returns if they initiate a payout
There are a number of companies that have the financial ability to start paying dividends to shareholders, according to Morgan Stanley. Those that do so have the potential to then generate outsized returns for investors, strategist Todd Castagno said in a recent note. The firm found that companies that initiate a regular, quarterly dividend outperformed the market by an average 650 basis points in the six months post announcement, and by an average 920 basis points 12 months afterwards. Dividends can also help stabilize portfolios during times of uncertainty and high valuations, Castagno wrote. “During times of higher risk and valuations, dividends play a greater role in investors’ total returns, helping reduce volatility and offering some support for stock prices,” he said. “When growth slows and interest rates fall, stable, higher-yielding dividends become more appealing as cash and fixed income options lose their allure.” To find so-called “dividend hopefuls,” Castagno screened for companies that don’t currently pay a quarterly dividend, but have a net cash position that is more than 5% of their market cap and generate a free cash flow yield greater than 3%. Here are some of the names that made the list. Lyft has a free-cash-flow yield of 11% and a net cash position of 12% of its market cap, Castagno said. The ride sharing company recently reported an earnings beat for its third quarter. It also saw record free cash flow of $277.8 million for the quarter, compared to $242.8 million a year prior. “We are well positioned to accelerate growth through the end of 2025, and into 2026. We remain on track to deliver on our long-term targets,” chief financial officer Erin Brewer said in the earnings release last week. Lyft’s stock has gained 83% so far this year. Charles Schwab also saw a stellar third quarter, topping Wall Street’s expectations for both earnings and revenue. In addition, the broker and financial services provider announced last Thursday it is buying private markets platform Forge Global in a deal valued at $660 million. “By bringing the size and scale of Schwab to this marketplace we are going to create liquidity and demand on both sides of the equation and bring private markets to more and more investors in our country,” CEO Rick Wurster said in an interview with CNBC. Schwab’s net cash position is 12.3% of its market cap. It has a free-cash-flow yield of 8.7%, per Morgan Stanley. Shares have moved 29% higher year to date. On the other hand, Maplebear , better known as Instacart, is down about 12% so far this year. The grocery delivery company reported an earnings and revenue beat before the bell Monday. Instacart also launched a new suite of artificial-intelligence solutions for grocers earlier this month. The company has a free-cash-flow yield of 8.3% and a net cash position of 16.2% of its market cap. Lastly, Twilio ‘s net cash position is 8.7% of its market cap. Its free-cash-flow yield is 5.4%. The cloud communications software vendor recently posted a beat on both the top and bottom lines for its third quarter. It also raised revenue, profitability and free-cash-flow targets for the full year. Twilio now anticipates free-cash flow of $920 million to $930 million for 2025. The stock is up nearly 21% so far this year.
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