Meta dividend announcement: Should I just throw in my lot with US ‘Big Tech’?

Alongside gains for Amazon and a slightly less upbeat update from Apple, the circa 15% surge in Meta’s share price in after-hours trading – coming on the crest of last year’s stellar gains for the Magnificent Seven - will leave many UK investors wondering: should I just throw in my lot with US ‘Big Tech’?

Jason Hollands, managing director of investing platform Bestinvest by Evelyn Partners, says that investors should not get too carried away with what might feel like a paradigm shift:

“2023 saw eye-popping returns on US mega-cap growth stocks, with the Bloomberg Magnificent Seven Index, which is comprised of an equal weighting in these seven gargantuan stocks, soaring an impressive107%, in large part driven by investor excitement by the potential of AI. After that, some were probably wondering how much further they could go in 2024.

“Meta’s announcement was remarkable in several ways. The numbers were astounding, with reported and forecast revenues outgunning expectations, advertising profitability and user numbers surging, and the firm also managing to keep costs under control. Profits multiplied to $10.6 billion for the quarter to end-December from $300 million a year earlier. But it’s the dividend that will raise eyebrows: not only did Meta announce an additional share buyback of $50billion but nearly 12 years after its landmark 2012 IPO it announced its first dividend payout to shareholders of 50 cents a share.

“That means it joins Apple, Microsoft and Nvidia among the Magnificent Seven growth stocks in adopting a dividend policy. The promise of a little income as well as the potential for growth will have been a major factor in driving Meta stock up ~15% last night.

“There was a less revelatory update from Apple where there are concerns about slowing sales in China, which accounts for a fifth of its sales. But Amazon’s stock was also up 7% after a not-altogether positive announcement, helped by messaging around cost controls. Barely one month in to 2024, the Bloomberg Magnificent Seven Index is up 3.4% and the tech-heavy Nasdaq Composite index is up 4%. This is bound to turn the heads of investors, who must be wondering if they can maximise their gains by throwing in their lot with US ‘Big Tech’ and the AI narrative that has powered some of those stellar gains.

“What many private investors must remember, is that they could already be exposed to these companies, because of the increasingly extreme concentration amassed in many global and US funds to US mega-cap growth stocks. A passive S&P 500 index tracker will now be about 28.6% devoted to the Magnificent Seven because of their soaring market capitalisations, while even a global equities tracker following the broader MSCI World Index comprised of 1,480 companies will have around 19% exposure to these seven big beasts which together are now valued more than the entire Japanese, US and Canadian stock markets combined! Many actively managed global equity funds also have exposure to these ‘superstar stocks’ of the moment.

“So, investors need to think carefully whether they are already taking enough of a bet on what is such a narrow cluster of companies before piling further cash in behind them.

“There’s no doubt that sectors like technology and businesses with online models have developed considerably since the start of the century, shifting from relatively speculative businesses to ones that are maturing and highly profitable, making them a major driver of global markets and many funds’ investment performance. Whether to ‘double down’ on this situation and take on extra exposure to by buying individual shares or specialist tech-focused funds or investment trusts is a personal decision that should be taken with consideration as to your overall portfolio diversification and the risks.

“Adventurous investors with a strong belief in the AI theme and a higher risk tolerance, might decide to add a satellite tech-focused fund to their core holdings, or an ETF that zooms in on the Magnificent Seven. But just through the gains of the last 12 months it’s likely that many portfolios will have become skewed towards the giants of the S&P 500, and that natural concentration will be enough of a portfolio bet for most investors with average risk-tolerance.

“Diversification both by geographical and by sector generally protect the private investor against sudden shifts in sentiment, macroeconomic shocks, regulatory environment and geo-political disturbances. Investors must remember that each of these unknowable elements could suddenly turn the tide on runaway growth stocks, as occurred in 2022.

“But those who have traditionally ‘stayed at home’ and skewed their portfolio towards the UK stock market or income stocks, will have missed out on a lot of the equity growth of the last 20 years and should consider a rejig to gain exposure to global equities.”