Is Alphabet’s Next Share Price Catalyst a Dividend?

Initiating a dividend introduces a stock to a much larger investor base. This is because some institutional fund managers have restrictions on the kinds of stocks they can and cannot buy. Without a steady stream of income, some investment mandates will simply pass. 

In most sectors, declaring a dividend offers assurance that the board of directors is confident about the company’s future cash flow. In the technology world, however, this perception isn’t always the case. Some will view the initiation of a dividend to be a concession that its growth days are in the rearview mirror. In other words, it looks like the company has no better uses for its cash other than to give it back to the shareholders.

However, that didn’t stop Apple from continuing to climb. In March 2012, amid pressure to make use of its $150 billion in cash at the time, Apple declared a dividend and promised to buy back more of its stock. Since then, the company has paid out almost $151 billion in dividends and bought back over $650 billion in stock. Meanwhile, the share price has climbed +700%.

Microsoft has paid a dividend since 2003. It regularly increases its dividend by a few pennies per share every four quarters. Trading near an all time high, Microsoft continues to be thought of as a growth company due to its cloud business and artificial intelligence (AI) developments.

Last month, Meta Platforms initiated a dividend to everyone’s surprise. Meta announced the dividend, which will accompany a 0.5% yield, during its well-received earnings release. The market welcomed the news, propelling the stock by +20% the next day.

So, is Alphabet (formerly Google) the next company to join the dividend club?

Historically, Alphabet has preferred to return capital to its shareholders through stock buybacks. This is done by repurchasing Alphabet shares in the open market and then cancelling them. In turn, the stock price drifts higher because there are fewer shares floating around in the market. Last year, Alphabet repurchased almost $62 billion of its shares. To put this into perspective, the market capitalization of Alphabet is $1.83 trillion, so $62 billion would represent about 3.4% of the entire company.

Just like Apple in 2012, Alphabet can initiate a dividend while also continuing to buy back their own stock. 

At the end of 2023, Alphabet had over $110 billion in cash on its balance sheet. Remember that Apple had $150 billion back in 2012. In 2023, Alphabet earned almost $74 billion in profit and generated just about $70 billion in free cash flow.

Why not initiate a $5 billion dividend?

• That’s the same dollar figure Meta ($1.26 trillion market cap) has committed to their dividend;

• It would increase the investor base much like Apple did in 2012; and

• Its $60 billion share buyback program and a $5 billion dividend can be funded via the existing $70 billion in free cash flow.

While Alphabet no longer grows at the steady 20% per year that it once did, it’s still a growth company. Despite all the chatter about AI, cloud computing, autonomous vehicles, and even their bizarre experiment to eliminate mortality, Alphabet at its core is an advertising company. Ad spending constitutes almost 80% of their revenues and just about all of the operating profit. The world still spends 30% of its advertising dollars on traditional media (radio, television, print). Profits are to accelerate 17% in 2024, 15% in 2025, and 14% in 2026 if analysts have their forecasts right.

We will continue to hold shares of Alphabet for our clients. We believe the next catalyst to propel the shares higher is the initiation of a dividend.