5 High-Growth Stocks Dividend Investors Should Watch | Panda Anku

Companies that are early in their growth phase typically don’t pay a dividend. They prefer to keep their earnings in order to expand their business.

However, as they mature and start generating excess cash, they could use some of that money to pay a dividend. Here are five money-hungry companies that aren’t doing it right now pay a dividend but certainly could in the future.

Waiting for the next level of maturity

Arista Networks (A NET -2.06%) does a great job turning revenue into cash. The leader in data-driven networking equipment surpassed the $1 billion revenue milestone in the first quarter, up 20% year over year. The company generated $101 million in cash from operations for the quarter and helped grow its cash balance to $2.9 billion with zero debt.

It used some of its cash buy back shares — it repurchased $483.7 million in the quarter and $693 million since its $1 billion program was approved last October — and made two acquisitions totaling $158.9 million. While Arista isn’t paying a dividend just yet, it does see it in the future as the business matures.

Fast growing free cash flow

CrowdStrike Holdings (CRWD -2.68%) benefits from the growing demand for Internet security Services. The company’s cloud-based protection platform generates recurring revenue and growing free cash flow. Revenue rose 61% to $487.8 million in the fiscal second quarter, while free cash flow hit $157.5 million, up more than 34% year over year. This brought the cybersecurity company’s cash on hand to $2.15 billion versus just $740 million in long-term debt.

CrowdStrike remains firmly in growth mode, aiming to grow its Annual Recurring Revenue (ARR) from currently around $2 billion to $5 billion by 2026. However, a company that’s already generating plenty of recurring free cash flow that should continue to grow rapidly has the potential to be a great dividend growth stock going forward.

Deposit into the payroll

Paycom software (PAYC -2.58%) generates a lot of recurring revenue and cash flow by selling subscription-based software to help businesses manage their human resources. The payroll company’s revenue rose 30.9% in the first quarter to $316.9 million. The Company generates free cash and has a strong, cash-rich balance sheet that ended the second quarter with $279 million in cash and equivalents versus $29 million in total debt.

Paycom is currently using its cash flow to grow the business and buy back stock, and recently increased its approval to $1.1 billion. Because of this, a dividend doesn’t seem likely in the near term. However, with a strong balance sheet and a money-hungry business, Paycom is the type of company that could become a great dividend growth stock as it matures.

Starts producing lumps of money

Zscaler (ZS -5.18%) shares many similarities with CrowdStrike Holdings. It also capitalizes on the growing cybersecurity threats with a cloud-based security platform that generates recurring revenue and free cash flow. The company’s revenue rose 63% to $286.9 million in the fiscal third quarter. Meanwhile, free cash flow was $43.7 million, or 15% of revenue. This helped increase cash to nearly $1.7 billion versus $954.6 million in convertible senior notes.

Zscaler is very early in its growth phase and hit the $1 billion ARR milestone this year. It has ambitions to grow its ARR to $5 billion in the future, setting the stage for it to produce even more free cash flow that it could one day use to pay a dividend.

Zoom in on free cash flow

Zoom video communication (ZM -3.57%) is a money flow machine. The company’s subscription-based video conferencing software generates recurring revenue and cash flow. Zoom’s revenue rose 12% in the first quarter to nearly $1.1 billion. Meanwhile, the company converted nearly $0.50 for every dollar of sales to free cash flow during the quarter, as adjusted free cash flow was an impressive $501 million. This brought Zoom’s cash and marketable securities to $5.7 billion on its debt-free balance sheet.

The company has already begun returning some cash to shareholders and earlier this year authorized a $1 billion share buyback program to buy back some of its run-down stock. While introducing a dividend seems a long way off, Zoom has the funds and cash flow to pay an attractive dividend going forward.

The potential to become great dividend stocks

Arista Networks, CrowdStrike Holdings, Paycom Software, Zscaler, and Zoom Video Communications are all still in the early stages of growth. Because of this, they probably won’t be paying a dividend any time soon.

However, dividend investors should keep an eye on these stocks as they look ahead. They generate lots of recurring cash flows and have liquid balance sheets, which are ideal traits for dividend stocks. Because of this, they have what it takes to become great dividend-growth stocks one day when they reach this stage of business maturity.

Matthew DiLallo has held positions at Arista Networks, CrowdStrike Holdings, Inc., Paycom Software, Zoom Video Communications, and Zscaler. The Motley Fool has positions in and recommends Arista Networks, CrowdStrike Holdings, Inc., Paycom Software, Zoom Video Communications, and Zscaler. The Motley Fool has a disclosure policy.

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