Does Alphabet's Dividend Mean Anything to Investors?
Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) is making a move it has long avoided -- initiating a dividend. The stock will now pay shareholders $0.80 per share annually, joining all of its megatech peers (other than Amazon) by becoming a dividend stock.
Traditionally, innovation and growth have driven Alphabet stock during its history. The company continues to dominate search and has long led the way in artificial intelligence (AI), incorporating AI into every product since 2016. Also, a liquidity position of $108 billion gives it tremendous resources to keep it on the cutting edge.
The question is whether this changes the investment case for the company.
The Alphabet dividend
In past decades, tech stocks like Alphabet had developed a reputation for prioritizing growth over dividends. However, most companies with the largest market caps are now tech companies, and most tech stocks have followed the lead of mature companies in other industries and offered a payout.
Still, the Google parent waited a long time to make this move. It comes nearly 20 years after launching its initial public offering (IPO). It also waited until it achieved a $2 trillion market cap and its aforementioned massive liquidity position before offering a dividend. Such levels make it a "mature" company by just about any measure.
Nonetheless, Alphabet can probably afford this payout. Its number of outstanding shares is around 12.35 billion, meaning the dividend will cost about $10 billion annually at current levels. In comparison, Alphabet generated $17 billion in quarterly free cash flow in the first quarter of 2024, more than enough to cover payout costs.
In terms of returns, at $0.80 per share annually, shareholders earn a yearly dividend yield of just under 0.5%. In comparison, the average S&P 500 dividend return is 1.4%.
Effects on shareholders
Given that dividend yield, the move to offer the payout looks more like an attempt to conform to the behavior of other mature companies. At current levels, it is unlikely to motivate shareholders who can earn a higher cash return from a bank account.
Moreover, that return may seem astonishingly small to those who have owned Alphabet stock since the beginning. Alphabet, then known as Google, launched its IPO in August 2004 at a split-adjusted price of $2.13 per share. At that rate, it will still take 11 quarters for these investors to earn their original investment back in dividends!
Furthermore, it also authorized $70 billion in share repurchases, seven times as much as the annual cost of the dividend. Thus, investors should not expect the dividend to materially affect shareholder behavior.
The investment case for Alphabet
Ultimately, investors should continue to focus on the non-dividend case for owning Alphabet stock. At less than 0.5% yearly, the dividend yield is around one-third of the S&P 500 average.
Additionally, most of the cash being returned to shareholders will come in the form of share repurchases. Thus, the payout is likely an attempt to conform to the behavior of other large companies rather than becoming a major source of shareholder returns.
Knowing that, investors should probably stay the course with Alphabet. Its search dominance, AI leadership, and massive cash position helped make it a leading tech company. The new dividend does not appear to change that for the better or for the worse.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Amazon. The Motley Fool has a disclosure policy.
Does Alphabet's Dividend Mean Anything to Investors? was originally published by The Motley Fool