Maybe Google Should Pay a Dividend

18 Comments

Five years ago this April, Google (s goog) 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 (s msft) 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.

18 Comments

Qlubb-Andy

Agreed with @Yuvamani.

If you are on the board of Google, you’re likely to think any money that could go into a dividend would earn much higher returns if it is invested in some part of their business. While Google is still dominant, there is still much growth and market opportunity to be captured.

Kevin Kelleher

@Yuvamani. Great points on GE and AMZN. Amazon’s stock seems to operate according to its own peculiar logic, which I haven’t figured out yet.

Yuvamani

excellent article : some comments …

“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.”

– Once you turn ON a dividend, you cannot turn it off easily – Ask GE.
– Google is still investing in the future, It is just investing in a different future. Google was investing in 2 broad areas, Advertising infrastructure – google print ads, radio ads , social networking ads thorugh myspace, feed burner etc could all be considered experimental investments in this area. They have been scaling back some of the investments in this area.
The other investment area is the web as a software platform. There they have 2 broad investments: apps like docs, mail etc and development tools like appengine, chrome, gears etc. They are not completely scaling back on this area and in lot of ways this is a better fit for google … Any of the apps here are monetized using an advertising, freemium model which Google has already mastered.

In a recession, you do have to tune your investments a lot better and that is what google is doing. When the recession is over (the hope is) Google will come back to its capital gaining ways … We are still in the early days of the cloud as an operating system. And that is where Google (thinks it) will win.

Also think about google senior web sibling – AMZN . Over the years the stock has swung like a yoyo. That does not mean the steady capital gains days are over, It means that the stock market has a lot of difficult figuring out what its worth. According to me AMZN is a good long term bet (even if it may be overvalued in the short term)

Wooster

“They are more likely to switch to a tech company that has willingly paid out dividends during lean years: say, Microsoft.”

Regarding the disclosure, does the author have a position in MSFT?

PerfectMoney

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

Nirav

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

Sol Rosenberg

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.

knowTooMuch

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

Ben

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.

Brendon

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.

Simon Cast

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.

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