Google (GOOG, Financial) is one of the most respected and successful technology companies in the world today. The company has been involved in many successful product innovations and has seen a phenomenal increase in its cash flow in the past decade or so. Along with companies like Microsoft (MSFT, Financial) and Apple (AAPL, Financial), Google was appreciated for its market capitalisation capacity which is over $300 billion. However there is a marked difference between Google and the other two. While Microsoft has been paying out dividends to its shareholders from the year 2003-2004 and Apple from the year 2012, Google is still following the primitive policy of not paying dividends. The enormous cash flow generation that Google witnesses every year is pooled back into the business in order to create more growth and capital appreciation. However, industry experts believe that it is high time that Google starts following the likes of Microsoft and Apple and start paying out dividends in order to satisfy its shareholders. Why does it become absolutely imperative for Google to follow this? Here is a look into the facts.
Firmness in cash flow
It is the normal practice for any company to pay out excessive cash flow to shareholders in the form of dividends, especially when the amount earned is really huge. This is what happened with Apple and Microsoft. When Apple and Microsoft had generated $155 billion and $103 billion worth of cash flow respectively, they decided to pay out dividends. Data collected from reliable sources reveal that the retained earnings of Google for the third quarter of 2012 were close to $46 billion. This is a lot of cash to be left in the bank or to be reinvested for internal innovations. With the current rate of earnings, it is high time that Google pulls a trigger on its age-old policy and starts working out on the percentage of dividend pay-out.
Recent launches have been potent failures
While Google has been the undisputed leader in the search engine and email sectors, it has experienced embarrassing losses when it launched products like Buzz, Wave and GOOG-411. As a technology company, Google’s decision to invest in new product launches is completely justified. However, the point in question here is the amount that it uses for the same. At the current stage, where innovations are not going on the right track, Google should step back and reduce the amount spent on the same and use the same for paying out dividends. The other leading technology companies in the market are currently following this strategy and in order to sustain in the present scenario, Google needs to change its strategy when it comes to dividends.
Maintaining financial transparency
Paying out dividends brings about satisfaction for a company’s shareholders. When shareholders know that there is a lot of cash lying in Google’s balance sheet, but still not a dime is being paid out to them, it proves to be a huge bolt for Google’s financial credibility. Google pays out huge amounts of stock-based compensation to its shareholders. As per recent reports, Google had invested close to $1.2 billion in the form of stock-based compensation. There has come a time now when shareholders have started expecting regular dividends from Google than these stock awards. Also piles of cash lying in the balance sheet could encourage the company to invest heavily in acquisitions, product launches and various other initiatives. This has not gone down well with the shareholders. Hence, in order to prove its transparent financial system, Google has to start paying out dividends at the earliest.
Acquisition has not been a success
During the year 2012, a whopping $12.5 billion was spent by Google in acquiring Motorola (MSI, Financial) Mobility. The basic idea behind this acquisition was that Google wanted to create a niche area for itself in the mobile hardware market. It also joined hands with HTC and launched the all new Nexus smartphone. In the software sector, it bought Android Inc. during 2005 to give operating systems of other smartphone manufacturers, a run for their money. Billions of dollars were invested in these acquisitions, but they failed to translate into something eventful in the books. During 2012, Google reported a loss of $527 million on account of the Motorola acquisition. If Google keeps on investing in the not-so-profitable acquisitions like these in future, it could land itself in deep financial trouble. Hence, it must act wisely and use a portion of its excess cash flow to pay out dividends and add value to its shareholders’ worth.
Conclusion
While reinvesting and pooling back earnings for the sake of business development, growth and expansion is alright until one stage, it is equally important to think from the shareholders’ point of view after a particular point of time. Going by the current financial data, Google has reached that tipping point, where it needs to evaluate itself and bring about a change in its age-old policy. Following the likes of its competitors like Microsoft and Apple, Google should start to pay out dividends to its shareholders as early as possible. By doing so, it will not only bring joy and contentment to thousands of its shareholders, but also, save itself from investing in too many product launches and acquisitions that would become too much of a burden for it to carry.
