There are many companies today awash with cash and not many ideas on how to invest it; at least not in ways that will generate the types of returns these companies have had in the past. Even Apple, whose founder Steve Jobs was against paying dividends of any kind, finally caved in after the unfortunate passing of Mr. Jobs, and declared a dividend per share of $2.65. Not a generous dividend, considering the company generates tons of cash on top of the billions already on the balance sheet. However, the move is underpinned by increasing pressure for companies to pay dividends, particularly technology companies that have had astronomical growth in the past and have amassed huge amounts of cash.
Google is one company - with almost $10 billion in cash and an additional $12 billion in free cash flow per year - that has the ability to pay a dividend without affecting its financial stability. While growth projections are still in the 20% range, growth has slowed for the search-engine-monster-turned-consumer-tablet-powerhouse company. With the recent release of its own tablet to compete with the ever-popular iPad, Google is attempting to play in Apple's court. Will Google follow suit and pay a dividend?
Let's look at other technology companies that pay dividends:
- Microsoft - develops, manufactures, licenses and sells the software products we all use on a daily basis. The company is also moving aggressively into mobile and video game consoles. While some might consider it the dinosaur of technology companies, it has paid a dividend since 2003 and currently has a dividend yield of almost 2.65%. That's a payout ratio of about 23%.
- Accenture - although this is a consulting firm, it is heavily dependent on technology spending. Accenture has paid a dividend since 2005 and currently has a dividend yield of 2.33% with a payout ratio of 28%.
- Seagate Technology - the maker of hard disk drives for enterprise applications, client computing applications and personal data backup systems. Seagate has a current dividend yield of 3.92% and a payout ratio of 32%. It has paid a dividend since 2003.
- Analog Devices - designs, manufactures, and markets integrated circuits used in communications, computer, industrial and other industries. Earlier this month, it had a current dividend yield of 3.32% with a payout ratio of 33%.
- Cisco Systems - designs, manufactures, and sells networking and other products related to communications and information technology. Cisco initiated a dividend just last year with a current yield of 1.68% and a payout ratio of 10%.
In fact, it may be safe to say that Google wouldn't be as successful as it is had it not been for the success of some of the companies listed.
A Dividend in the Future?
So, should Google pay a dividend? It should. Let's assume that the tablet is wildly successful and growth exceeds forecasts and the stock climbs even further. Well, if the tablet is successful in increasing growth again for Google, then the company will amass even more cash. Google just doesn't need it all and won't be able to make it grow as rapidly as it has in the past. Google is a great company, but it's becoming a dinosaur in the technology sector.
Let's assume that Google decides to pay a dividend. What can that possibly look like? Let's say the company decides on a payout ratio of 35%. That equals about $11.68 per share on earnings per share of $33.37. Based on a stock price of $587.83, that would give investors a yield of 2%. This is in line with other technology companies that have decided to pay a dividend, appeasing some shareholders, while not affecting their ability to invest their current cash and continued free cash flow in growth opportunities. With current cash per share of $30.62 and free cash flow of $36.60 per share, $11.68 is very feasible.
The Bottom Line
Besides the continued growth prospects of the company, a modest dividend, as described above, would drive the stock price up, as income-seeking investors become attracted to the stock for its dividend and growth potential. Google will surely pay a dividend in the near future; it's already long overdue.