Many companies in Australia pay a dividend that also includes the generous effects of franking credits. Dividends also have the pleasing effect of giving shareholders a physical return, not just the ever-changing share price.
However, if companies have solid growth plans then it might be worth it for management to not declare any dividends and hold onto the extra cash. The cash could fuel growth instead of having to rely on debt, or issuing new capital.
Here are three growth stocks that don't pay dividends with big growth plans:
Xero FPO NZX (ASX: XRO)
Xero is a cloud-only accounting software that's taking the world by storm. The New Zealand-based company has managed to grow its number of subscribers to over 1,000,000 in its latest results to 31 March 2017.
The level of automation and helpful tools makes Xero very popular with business owners and accountants alike. It's grown its annualised committed monthly revenue to NZ$360 million and also increased its gross profit margin by 1% to 77%.
The most pleasing thing about Xero's result was that the second half of its financial year generated a profit before interest, tax, depreciation and amortisation. Xero is doing the right thing by hanging onto its cash for growth rather than paying out a dividend.
Xero isn't yet making a profit or paying a dividend.
A2 Milk Company Ltd (ASX: A2M)
A2 Milk is another New Zealand company, which is the company behind the milk, baby formula and ice cream of the same name.
It has been growing at an impressive rate in its last few updates. In its half-year report to 31 December 2016 management reported that revenue had grown by 84% and net profit after tax had grown by 290%.
The share price may have gotten a little ahead of itself at $3.26, but that could still be a cheap price after a year or two of continued growth.
A2 Milk is currently trading at 33x FY17's estimated earnings and doesn't yet pay a dividend, although it does expect to soon.
Nanosonics is the company behind a disinfectant medical device which uses ultrasound probes. It's proving to be very popular with hospitals around the world, particularly with the rising hygiene requirements that are being enacted by health departments of different governments.
After all the research & development, followed by the marketing and distribution, it's finally starting to make a profit and additional revenue should now significantly boost profit.
Nanosonics is currently trading at 35x FY17's estimated earnings and doesn't yet pay a dividend.
Foolish takeaway
A lack of a dividend doesn't have to mean that a company is excluded from a watch list. All three of the above options could provide great total shareholder returns over the coming years. At the current prices, I think Xero has the most potential, but I'd be more comfortable investing in A2 Milk.
