Why Alphabet Inc Could (And SHOULD) Pay a Dividend – GOOG GOOGL

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Alphabet Inc (GOOGL) — the company formerly known as Google — must be doing something right. GOOGL has been one of the rare giant-cap winners since the bull market started to sputter.

alphabet-logo-185But maybe it’s time to do more.

Yes, GOOGL is down like everything else in the horrible start to 2016, but this is a recent phenomenon. Take a step back, and Alphabet is a big-time outperformer.

Alphabet shares are up nearly 40% over the last 52 weeks. The Nasdaq Composite and S&P 500 are negative over the same span. Even in decline, GOOGL is beating the benchmarks so far this year.

Of course, that’s cold comfort to investors sitting on shares that are rapidly losing value.

Enter the Case for an Alphabet Dividend

Since GOOGL can’t do much about falling ad prices or the troubling macroeconomic scene, perhaps it’s time to return cash to shareholders directly.

An Alphabet dividend would skew the company’s profile away from growth toward value, but it would be roundly applauded by shareholders.

After all, look what investors did when Alphabet announced a $5 billion stock buyback last year. Shares went on a tear, and the effects of the buyback are going to boost earnings per share quarter after quarter.

A dividend would further improve Google’s — er, Alphabet’s — relationship with investors, something that Ruth Porat, the new chief financial officer, has made a priority.

It also would provide a nice complement to GOOGL’s capital plan. Buybacks might help lift EPS, but dividends — despite being taxed twice — put cash directly into people’s pockets.

GOOGL Won’t Make It Rain, Though

There are no obstacles to Alphabet paying a dividend except policy. GOOGL has $73 billion in cash and investments on its books. It generated $2.7 billion in cash flow last quarter even after paying interest on debt (of which it has very little).

The problem is when a company starts paying a dividend, the market sees it as an admission that the days of outsize growth are over.

That’s not the case with GOOGL, but it clearly has more cash than ideas. Or at least more cash than it needs to invest in growth. If GOOGL’s cash hoard were a stock, it would be one of the biggest on the market, essentially equivalent to the entire market value of blue-chip United Technologies Corporation (UTX), a component of the Dow Jones Industrial Average.

Famously, Apple Inc. (AAPL) only initiated a dividend after a browbeating by hedge-fund billionaire Carl Icahn. There’s no reason to expect Alphabet to start paying one on anything less than something similar.

Alphabet reports quarterly earnings next week, but it is exceedingly unlikely that it will say anything about a payout.

The bottom line is that GOOGL has more than enough cash to buy back stock and pay a dividend, and its cash hoard has grown substantially every year since the company went public.

Shareholders love dividends, especially when markets aren’t behaving. If GOOGL wants to cushion any turbulence and calm restive shareholders, it should begin a payout.

Just don’t hold your breath.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2016/01/google-alphabet-dividend-googl/.

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