18 Comments

Summary:

Five years ago this April, Google filed to list its stock publicly. The founders let potential investors know it wouldn’t play by some of Wall Street’s rules, including paying them a cash dividend — which, the prospectus boasted, Google had never done. And as of today, […]

Five years ago this April, Google filed to list its stock publicly. The founders let potential investors know it wouldn’t play by some of Wall Street’s rules, including paying them a cash dividend — which, the prospectus boasted, Google had never done. And as of today, it still never has.

But maybe it should — at least until things turn around for Google.

The question of a Google dividend first came up a couple of years ago, when it was trading around $350 a share. Back then, a former employee wondered why the stock was worth anything to investors without one. The answer for most Google shareholders was capital gains. Shares of the search giant had tripled since its IPO, and would go on to double again over the next 18 months.

goog-chart1

But since as of Friday’s close, the stock is back down at $346, the question can be raised again: What’s the point of owning Google stock?

There are reasons to do so over the long term. Once the economy recovers, Google will be in a strong position to collect a lot of the growth in online ads. But in the meantime, there’s not a lot happening in the company’s favor. It appears to be losing market share in search, even as it faces new accusations of being a monopoly.

In better times, Google could afford to plow its profits back into newer areas that could yield growth in the future. But while it had trouble monetizing them, it believed strongly that the important thing was to let them develop naturally with proper nurturing. This year, it’s been backing off that patient approach, pulling out of radio and print ads.

But it’s still making massive profits — net income came in at $4.2 billion last year, or 19 percent of revenue. Its cash on hand has risen to $8.7 billion from $3.5 billion in two years. That’s a lot of money not going into new research and development.

Google has said time and again it’s not inclined to do any special favors for investors, but that’s not true, at least not strictly speaking. The company reset the price of stock options for employees after declines late last year left many under water. As Reuters pointed out, Google investors are unhappy about the double standard.

Any intelligent investor in Google knows the company has been clear from the start that it won’t coddle them. The biggest obstacle to Google paying a dividend is more of an emotional one — corporate pride. Dividends are what mature, aging companies pay to keep angry investors at bay. Let Microsoft pay them, but a spry, 10-year-old old company like Google won’t.

So investors aren’t likely to waste time with complaints that won’t be heard. They are more likely to switch to a tech company that has willingly paid out dividends during lean years: say, Microsoft. Given that Google doesn’t buy back shares, the selling could depress its stock further.

The fact is, Google is starting to act like an aging, mature company in slow decline. That doesn’t mean its best years are behind it, it means the company is going through something like hibernation for a few years. If the money it’s generating in tough times can’t be used to invest in its future growth, it might be better off shared with investors who are missing the heady days of capital gains at Google.

(Disclosure: I do not have any investment position, long or short, in Google.)

Chart courtesy of Google Finance.

  1. Capital gain in equities that doesn’t provide cashflow is a ponzi scheme. Arguably, companies should be required to provide a minimum dividend after a certain time being public.

    Share
  2. Google is one of the companies I own not for financial reasons, but because I want to be a part of a company doing great things for the world. That “hidden dividend” cannot be entirely ignored, even if it is not enough to attract most investors.

    Share
  3. My god, was this proofread at all?

    “net income cane in at”

    “act like an aging, mature company is slow decline”

    “That doesn’t mean it’s best years”

    “raised again: What’s the point” (‘W’ should be lower-case)

    “it believed strongly felt the important thing”

    Honestly, you and the “editors” of this site should be embarrassed. The shoddiness of your work disrespects your reader.

    Share
  4. Carolyn Pritchard Saturday, February 21, 2009

    @Ben-

    Those typos are fixed.

    thanks, best, Carolyn.

    Share
  5. Google execs/founds will take (a part of) their company pvt before ever paying a divy.

    Share
  6. It has been clear from day 1 that Google is run for the benefit of management and employees, not outside shareholders. Outside shareholders are just there to provide insiders with an exit strategy.

    Share
  7. This is not a bad idea considering they are throwing money earned in search business after all other projects that do not make money.

    Share
  8. I’m gonna buy one dividend just to hang it above my bed, haha

    Share
  9. I support not how you speak it ,I concern on what you are speaking,forget what the comment above me.I appreciate what you have written here BTW,for the actions what google did not to Pay the dividend I believe they do correct answer for the share holder.Google means Confident and as “google fans my self”I have my faith that Soon google will take back there “there action to happy the investor,and I think most the investor has the same Idea with me about this,wish I can have google share holder here and talk what they thought about that

    Share
  10. looks like a good idea for me

    Share

Comments have been disabled for this post