Doubtlessly, Google (GOOG, Financial) is one of the NASDAQ darlings today. Despite all the challenges, Google's fundamentals have remained strong. Google is still a leader in the search engine business, is a market leader in the internet browser space, its Youtube platform is becoming ever more popular, its operating system Chrome is gaining market share, and Google TV and Google Books were recently launched. With continuous plans to diversify, Google is certainly set to continue its growth path in the near future. The only thing missing here is a dividend.
The very thought of Google paying a dividend in the future sends my imagination racing. Many prominent companies in the technology sector have recently started paying dividends. Apple is the most prominent example -- Apple started paying a dividend again in 2012 after a break of several years. Overall, Apple revealed that it plans to return almost $45 billion to its shareholders over a period of 3 years. Apple's decision to pay a dividend to shareholders has now pressured other companies in the technology sector that have had phenomenal growth in the past and are sitting on a huge amount of cash reserve to do the same.
So, what's stopping Google from paying a dividend? All the ingredients are there -- Google has a cash reserve of more than $48 billion, has a cash flow margin of more than 30%, and a free cash flow of almost $14 billion. If Google decides to initiate a dividend of just around $3 per share, based on 330 million shares outstanding on a fully diluted basis, that would just be around a billion dollar on dividends, even less than 10% of the total free cash flow.
One can argue that Google's stock has performed well enough over the last 6 to 12 months that it doesn't warrant a cash dividend. No doubt, Google's shares have not only outperformed the NASDAQ technology index, but it is also outperforming the NASDAQ composite index for the last 12 months.
But Google can pay a dividend without affecting its financial stability. Analysts are comfortable with a long-term revenue growth outlook of 15% to 20% on Google, along with steady improvement in cash flow generation. I think Google can grow its cash flow at a 10%-15% rate for the long term, which will give it a steep looking compound cash flow growth rate of over 20%. That's enough cash to pay a dividend of $3 per share every quarter! Google paying a $3 quarterly dividend would cost the company around $4 billion a year. A company that's expected to make more than $20 billion in operating free cash flow could surely afford $4 billion.
Other companies in the technology sector that pay dividends:
- Cisco Systems -- Cisco initiated a dividend in early 2012 and currently has a yield of almost 2.7%
- Microsoft -- Microsoft has paid a dividend since 2005 and currently has a yield of almost 3.3%
- Analog Devices -- Analog Devices has paid a dividend since 2005 and currently has a yield of almost 2.6%
- Seagate Technology -- Seagate has paid a dividend since 2003 and currently has a yield of almost 4.8%
The way Google profits are growing, I wouldn't be surprised to see if the company decides to pay a dividend in the near future. Google can certainly afford one as it wouldn't cost them much. Moreover, a modest dividend would drive the stock price up, as income seeking investors will be lured to the stock for its dividend and growth potential. I think it's time for Google to pay a dividend, as it would most likely help the valuation of the stock on the long-term.
