Google is a profitable powerhouse. Alphabet, Google’s parent company, is a mega-cap stock with a market capitalization of $1.728 trillion, making it the 4th most valuable company in the world by market cap.
However, the tech giant does not pay its shareholders a dividend. Let’s look at why Google doesn’t pay a dividend and if it will ever pay a dividend in the future.
How Much Cash Does Google Have?
You may be wondering if Google can afford to pay a dividend to its shareholders. One way to determine this is to look at how much cash on hand and free cash flow the company has.
In Alphabet’s Q2 2023 financial earnings results, the company reported revenue of $74.6 billion, a 7% increase year-over-year (YoY). Cash on hand, which includes cash, cash equivalents, and marketable securities, was reported as $118.33 billion. Alphabet also reported a free cash flow of $21.778 billion for the quarter.
Alphabet is financially strong and has more than enough cash to pay its shareholders a dividend!
Why Do Companies Pay a Dividend?
Companies pay a dividend to their shareholders typically every quarter or annually. These payments represent a portion of the company’s profits that the board of directors decides to distribute during the dividend period. Companies distribute dividends based on the share price.
But why do companies pay a dividend?
- Attract income investors: By paying dividends, companies attract more investors who want to generate income from their investments. These investors use dividends as income by holding on to their stock. Most of these investors typically look for companies that pay large dividends before buying the company’s stock.
- Show financial strength: Dividend-paying companies are considered financially strong and signify that management has confidence in the company’s future earnings. This increases the stock’s appeal, with stock prices rising as demand rises. Paying dividends conveys a strong statement about a company’s future performance and prospects and demonstrates its financial stability.
- Share profits: Companies pay dividends to their shareholders to share their profits. Dividends are seen as a reward for investors and to persuade them to hold on to their stock. Dividend-paying companies are usually well-established and are seen as more reliable than growing companies that cannot repay capital to shareholders.
Why Do Companies Not Pay a Dividend?
There are several reasons why a company like Google doesn’t pay dividends.
Companies in its Growth Stage
Newer companies and startups are still in the growth stage and are likely not profitable yet. These types of companies tend to reinvest in the company to grow. They also focus more in the early growth stages on acquisitions, developing their products, expanding their business, and anything else that may be costly. Therefore, they are unable to afford to pay a dividend.
Well-established companies have many reasons why they don’t pay a dividend. Let’s look at a few examples of why they choose not to.
An established company like Alphabet (Google) generates sufficient profit and will want to focus on acquisitions. When the company started, Google was a search engine and has since become the world’s most popular search engine, with nearly 92% of the global search market.
Google’s mission statement, as stated in the founders’ letter from several years ago, may hold the answer to why they will likely never pay a dividend. In the founder’s updated letter, the founders, Larry Page and Sergey Brin, started the letter with the following statement:
“As Sergey and I wrote in the original founders letter 11 years ago, “Google is not a conventional company. We do not intend to become one.” As part of that, we also said that you could expect us to make “smaller bets in areas that might seem very speculative or even strange when compared to our current businesses.” From the start, we’ve always strived to do more, and to do important and meaningful things with the resources we have.”
Using available resources, Google is committed to meaningful projects that are unconventional in nature.
In the past 20 years, the company has expanded beyond search engines. It underwent a reorganization in 2015 and established the Alphabet holding company. The parent company owns several other companies in addition to its major subsidiary, Google. While some of these businesses are divisions of Google, others are held separately by Alphabet.
Using its cash to acquire smaller and new tech companies reduces future competition for Alphabet while expanding its business. Examples of Alphabet’s acquisitions include Fitbit, Waze, YouTube, and DoubleClick.
Reinvesting profits is not only for startups! Well-established companies continue to reinvest their earnings to grow the company. This is evident in Google X, sometimes known as the “moonshot factory,” which is home to several ongoing initiatives.
Examples of these initiatives include:
- Industrial robots
- Underwater camera systems for ocean farmers
- Using AI for sustainable food production
- Autonomous delivery drone service
Companies like Google will eventually see their share prices rise if they reinvest large amounts of their profits, adding value for their shareholders. Alphabet, therefore, reinvests profits to advance these initiatives rather than paying dividends.
Well-established companies can run into financial issues, resulting in not having enough cash to pay dividends. Some companies will start paying dividends and either cut or stop paying dividends when they experience financial hardships. It will be financially irresponsible for the company to continue paying dividends during this time, as they should use whatever cash they have to pay off debt.
However, Google is financially stable and has enough cash to pay dividends. In its latest financial earnings report, Alphabet reported $26.45 billion in debt. This is a manageable number considering the company’s cash on hand of $118.33 billion and free cash flow of $71.09 billion as of June 30, 2023.
Will Google Ever Pay a Dividend?
The question remains: Will Google ever pay a dividend? While the company has enough money to pay dividends, it will likely not pay a dividend soon. Alphabet focuses on innovation and expanding its products and services within various sectors.
However, this is subject to change, so investors shouldn’t be shocked if Alphabet begins paying dividends at some point during the next few years. The company is highly profitable, and debt is not a concern.
If you’re interested in buying Alphabet (Google) stock, don’t be discouraged by investing in a company that is not paying a dividend. Sacrificing immediate dividend payments in favor of long-term stock value growth can be beneficial.
There are several benefits to diversifying a portfolio with reliable stocks that increase in value over time, even without consistent dividends. These stocks are less vulnerable to temporary fluctuations due to this protection against market volatility. The long-term potential for this type of investment is significant.
Remember that all investments carry risks, so do your due diligence and speak to a financial advisor for advice if you’re new to investing.
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